Table 2: Measurement Of Financial Market Integration

No Method Developed by Basic Idea Measurement Applications/Equation

.
1 Cross-market Solnik and Following the LOOP, identical or Cross market dispersion measured as the Hodric-Prescott smoothing technique to estimate the long-term
return Roulet (2000) comparable assets across different log differences of the benchmark equity component.
dispersion economies should generate the same return. indices of various economies. 12- month moving average of the cross-market maximum–minimum
The low return dispersion indicates higher return differential to capture the dispersion of returns across equity
market integration and vice versa markets. The smaller the maximum–minimum return differential
between equity markets, the greater their return convergence
is.
2 Kalman Filter Haldane and Hall Model of Time Varying Parameter Ei,t is the equity market index level of 1) The signal Equation
(1991) Convergence in integration is reached if the economy i at time t
difference between two or more series is EB,t is the equity market index level of a 2) The state Equation
relatively small so that dominant regional market
EUS,t is the dominant external market at
time t proxied by the US equity when i approaches 0, the two series are converging
market when i approaches 1, Ei,t and EUS,t are converging
i to trend towards zero in the long run if the integration process is
complete
3 Dynamic Johansen (1988). Assess whether the process of integration is Use procedure of rolling cointegration Standardized Trace statistics= ratio between the trace statistics and the
cointegration Applied method completed in fixed time frame. test by calculating trace statistics to test corresponding 95% critical values
analysis of rolling The two series are cointegrated means whether there exist one or more If > 1 cannot reject null hypothesis of no cointegration
cointegration test moving together and not deviate or exist a cointegrating vectors If < 1 market cointegrated
by Pascual long-run relationship. If a system contains Pascual (2003) if there is an upward trend of trace statistics --. More
(2003) n market indices then for a complete evidence on cointegration
integration need n-1 cointegrating vector
(Kasa, 1992)
4 Common Bekaert and the dividend yields and forward premia, Method: regression
component Hodrick (1992) together with currency returns, are common Leads and Lags (rolling window to
approach and Campbell component factors which are able to capture measure dynamic cointegration = 3 years Yi,t is the (degraded) excess equity return of economy i, (from monthly
and Hamao the dynamics of the excess asset returns The Adj R-square  measure of equity stock market return expressed in local currency
(1992) market integration of economy I less 1-month LIBOR); Xj is a vector of which each element is an
(represents the contribution of the aggregate of an unweighted cross-economy averages of a common
common component factor over time. For component factor includes: currency
component to the total variance for the return (c), excess equity return (r), dividend yield (dy), and forward
excess equity return in economy i premia (fp)
5 Synchronizatio Pagan and Markets are integrated if more Measuring signal change of the market Follow Edward (2003):the rolling concordance index measured as:
n of financial Sossounov “synchronized” or in the same phase of by indicating the peaks and troughs
market cycle (2003) and financial market systems (turning point) value: 0<RCI<1; upward/downward trend of RCI the market
approach Edwards et al. more/less integrated
(2003)
6 Correlation Engle and Higher correlation between equity markets a two-step estimation procedure:
using dynamic Sheppard (2001) generally implies 1. Estimate univariate GARCH for each and
conditional and Engle higher co-movement and greater integration return series qij is the off diagonal elements of the variance–covariance
correlation (2002) between the markets 2. use the standardised residuals from matrix, qij is the unconditional expectation of the cross product zi,tzj,t
(DCC) model the first step to estimatethe dynamic and qij,t is the conditional correlation between the equity market returns
conditional correlations between of economy i and j at time t.
equity market returns