Time-varying regional integration of stock markets in Southeast Europe

Abstract

We investigate the dynamics of regional financial integration and its determinants in the context of an ICAPM accounting for the deviations from PPP as well as temporal variations in both regional and local sources of risk. Using data from four major countries of the Southeast Europe, our results support the validity of the ICAPM and show that changes in the degree of regional integration are explained principally by trade openness and stock market development whatever the measure of currency risk. As market integration induces both benefits and risks, our findings should have significant implications for economic policies and market regulations.

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