Skip to main content Accessibility help
×
Home
  • This chapter is unavailable for purchase
  • Print publication year: 2012
  • Online publication date: August 2012

Chapter 6 - The Economics of Financial Integration

from Part II - Financial Markets

Summary

Overview

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.

Suggested Reading
Baele, L.Ferrando, A.Hördahl, P.Krylova, E.Monnet, C. 2008 Freixas, X.Hartmann, P.Mayer, C.Handbook of European Financial Markets and InstitutionsOxford University Press
Edison, H. J.Levine, R.Ricci, L.Sløk, T. 2002 International Financial Integration and Economic GrowthJournal of International Money and Finance 21 749
Guiso, L.Jappelli, T.Padula, M.Pagano, M. 2004 Financial Market Integration and Economic Growth in the EUEconomic Policy524
References
Abiad, A.Leigh, D.Mody, A. 2007
Adam, K.Jappelli, T.Menichini, A. M.Padula, M.Pagano, M. 2002
Adjaouté, K.Danthine, J.-P. 2003 Gaspar, V.The Transformation of the European Financial SystemECBFrankfurt
Baele, L.Ferrando, A.Hördahl, P.Krylova, E.Monnet, C. 2004
Baele, L.Ferrando, A.Hördahl, P.Krylova, E.Monnet, C. 2008 Freixas, X.Hartmann, P.Mayer, C.Handbook of European Financial Markets and InstitutionsOxford University Press
Baltzer, M.Cappiello, L.De Santis, R. A.Manganelli, S. 2008
Cappiello, L.Gérard, B.Kadareja, A.Manganelli, S. 2006
Edison, H. J.Levine, R.Ricci, L.Sløk, T. 2002 International Financial Integration and Economic GrowthJournal of International Money and Finance 21 749
European Central Bank 2003 The Integration of Europe’s Financial MarketsMonthly Bulletin53
European Central Bank 2011 Financial Integration in EuropeECBFrankfurt
European Commission 2006
Guiso, L.Jappelli, T.Padula, M.Pagano, M. 2004 Financial Market Integration and Economic Growth in the EUEconomic Policy524
Hardouvelis, G. A.Malliaropulos, D.Priestley, R. 2006 EMU and European Stock Market IntegrationJournal of Business 79 365
Lane, P. R.Milesi-Ferretti, G. M. 2001 The External Wealth of Nations: Measures of Foreign Assets and Liabilities in Industrial and Developing CountriesJournal of International Economics 55 263
Pagano, M.Randl, O.Roëll, A.Zechne, J. 2001 What Makes Stock Exchanges Succeed? Evidence from Cross-Listing DecisionsEuropean Economic Review 45 770
Quinn, D. 1997 The Correlates of Change in International Financial RegulationAmerican Political Science Review 91 531
Wolswijk, G.de Haan, J. 2005