Economic impacts of financial market integration of euro area and central-east Europe countries: a structural VAR approach

In recent years, financial markets have become increasingly integrated, both domestically and internationally. During past financial crises in emerging market economies it has been observed that spillover does not affect only different asset markets in the same countries, but also markets in other countries. The global financial crisis supports the evidence that increasingly integrated financial markets originate a large degree of co-movements across markets through shocks transmission. The analysis of the level of integration between financial markets can help to understand how financial crises, in a specific Country or in an economic area, can be transmitted to other countries. Understanding the growing international interconnection of asset prices requires a complete and comprehensive modeling of the transmission channel. The paper adopts a new methodology based on the identification of a structural VAR. The results yield some insights into the shocks transmission between international financial markets. Strong co-movements between the Euro area corporate bond market and the EMBIG indices seem to characterize the relationships between financial markets in Europe. The analysis also provides some evidence that the effect of a shock to the emerging markets on the mature ones is stronger than vice versa.