Candidate: Sonila Beliu

Degree of: Doctor of Philosophy

Department: Economics

Title: International Financial Integration

Committee: Dr. Susan Pozo, Chair
Dr. Mark Wheeler
Dr. Dennis McCornac

Date: Monday, June 6, 2005 9:00 a.m.- 11:00 a.m.
2302 Friedmann Hall

Abstract: During the last two decades the degree of international financial integration (IFI) has increased substantially. This increased level of integration between countries has a number of benefits. First, more integrated financial markets can lead to more efficient allocation of saving and investment across countries and, therefore, facilitate consumption smoothing. Second, higher degrees of international capital mobility will enable domestic investors to achieve a higher level of diversification in their investments. Third, the industrial sector will benefit from having better access to the world's capital supply and eventually this increase in the level of financial integration will have a positive impact on countries' output growth. In all, higher levels of financial integration can lead to a more efficient economy and ultimately to a higher level of economic well being.

The empirical investigation of the degree of IFI has mainly focused on the analysis of international stock market integration. This literature has ignored the examination of the degree of integration across international bond markets. This lack of the international bond market analysis is not because of decreasing importance of these markets relative to the international stock markets. The size of international bond markets is comparable to the size of international equity markets. In some countries, and in particular in European countries, the bond markets are larger than the equity markets. In addition, the behavior across international bond markets reflects political efforts to increase the degree of international financial integration. Therefore, by analyzing these markets, we will be able to look at different dimensions of IFI and paint a broader picture of this process.

This dissertation consists of three essays. In each essay we present different approaches for measuring the degree of IFI across countries. In the first essay we study the dependence structure among international bond returns by focusing on two common approaches to IFI: i) rolling correlations and ii) cointegration analysis. In addition, we analyze how the observed increase in the dependence structure across international bond market is reflected in business cycles. In the second essay we employ another approach to measuring the degree of financial integration across international bond market returns. In particular, we investigate the level of integration across the international bond markets by testing for the presence of a common volatility process across these markets. In the third essay a dynamic measure of international financial integration is obtained. This measure differs from the correlations approach as it corrects for the changes in dynamic dependence across international bond markets due to higher volatilities. In addition, in this essay, we use the saving-investment relationship and cross country correlations to determine the degree of capital mobility across countries. In this way we are able to compare the benefits of using the new time-varying measure of IFI to these two traditional measures.

In conclusion, we find an increase in the level of financial integration especially across major European Union country members beginning in the mid-1990s. However, during the last three to four years there is some evidence that this integration may be trending downward. The results with regard to the U.K are especially interesting. Our findings suggest that U.K. is not highly integrated with the European countries, nor with the rest of the world.

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