This chapter begins by defining financial integration and identifying its drivers. Financial integration may be defined as a situation without frictions that discriminate between economic agents in their access to – and their investment of – capital, particularly on the basis of their location. Not only market forces but also collective action and public action are shown to be driving financial integration.
The second part of the chapter deals with measuring fi nancial integration. Three categories of measures have been used for this purpose. The first category consists of price-based indicators that measure discrepancies in prices or returns on assets caused by the geographic origin of the assets. The second category consists of news-based measures. The underlying idea is that in a financially integrated area, portfolios should be well diversifi ed so that news (i.e. arrival of new economic information) of a regional character has little impact on prices, whereas common or global news is relatively more important. The third category of measures are quantity-based indicators that measure the effects of frictions faced by the demand for and supply of investment opportunities, like cross-border activities or listings, and statistics on the cross-border holdings of investors.
The third part of the chapter gives an overview of the extent to which various fi nancial markets in the EU are integrated. An important reason why the European Union put the creation of a single fi nancial market high on the policy agenda is that it widely believed that fi nancial integration may stimulate economic growth. This growth effect and other consequences of fi nancial integration are discussed at the end of the chapter.