Are "new" and "old" EU members becoming more financially integrated? A threshold cointegration analysis

Abstract

We assess the degree of financial integration for a selected number of "new" EU member states with Germany. The analysis is performed using a threshold vector error-correction (TVECM) model with fixed rolling window. By employing this methodology we are able to evaluate the degree and dynamics of transaction costs resulting from various market imperfections. TVECM model is applied on interest rate data from different segments of financial markets covering the 1994-2006 period. The hypothesis we test is to what extent European integration tendencies resulted in a more efficient and integrated financial markets. Our findings support the gradual integration hypothesis.