Empirical analysis of the relation between financial crisis and financial integration: The case of European Union

With the increasingly globalizing financial markets, crises affect not only one or several countries but all countries at different levels. Empirical evaluation of the effects of crises on financial integration is an important issue. This study examines the relationship between financial integration level and crisis with the help of beta and sigma convergence models. For this purpose, firstly, the level of integration difference between countries is estimated with the help of the "international risk sharing" hypothesis based on the Feldstein and Horioka model. According to the results of Feldstein and Horioka analysis, it has been determined that the countries, that have entered the union firstly, have high integration levels. Beta and sigma convergence models are used to measure the level of integration. Balanced and unbalanced panel data analyzes are used in the estimation of these models. The relationship between financial crisis and integration is analyzed empirically by comparing pre-crisis performances with post-crisis country performances with the help of beta and sigma convergence models. Furthermore, in order to examine how the performance of the new member states and the member states that have completed their integration are affected in the previously mentioned relationship, the data of the pre-2000 integrated countries and the new countries joining the integration after 2000 has been tested and categorized during the period of January 1991- December 2018. According to the results of beta convergence analysis, predicted by using the short-term interest instruments, it is found that 12 countries participating in integration before 2000 were more successful compared to the contries that have not completed their integration in coping with the crisis. On the other hand, the balanced panel findings of the integration-crisis relationship are found to be more consistent than the unbalanced panel analysis findings. In addition, long-term beta convergence balanced panel analysis results show that the ability of the integration to absorb the negative effects of the crisis period in the long run is statistically significant compared to the short-term unbalanced panel data. Findings obtained from sigma convergence analysis support the results obtained from beta convergence analysis. Keywords: Integration, Financial Integration, Beta – Sigma Convergence, Crisis, European Union