Measuring financial integration in the euro area

TLDR

The paper introduces measures to quantify the state and evolution of financial integration across the euro area. The authors develop price‑based, news‑based, and quantity‑based indicators across five key markets—money, corporate bond, government bond, credit, and equity—to assess integration. They find the unsecured money market fully integrated, government and corporate bonds and equity markets highly integrated, while the credit market—particularly its short‑term segment—is the least integrated.

Abstract

In this paper, we present a set of specific measures to quantify the state and evolution of financial integration in the euro area. Five key markets are considered, namely the money, corporate bond, government bond, credit and equity markets. Building upon the law of one price, we developed two types of indicators that can be broadly categorised as price-based and news-based measures. We complemented these measures by a number of quantity-based indicators, mainly related to the evolution of the home bias. Results indicate that the unsecured money market is fully integrated, while integration is reasonably high in the government and corporate bond market, as well as in the equity markets. The credit market is among the least integrated, especially in the short-term segment.