Integration of international capital markets: Further evidence from EMS and non-EMS membership

The present paper examines whether real interest rates from nine financial markets - five European Monetary System (EMS) and four non-EMS markets - are financially integrated both on a world-wide basis and within each market individually. Monthly data on nominal interest rates and prices over the period 1982:1-1993:12 along with the methodology of cointegration are used to serve the purposes of the empirical analysis. The results provide support to the integrated market hypothesis as regards the financial markets considered altogether, as well as the financial markets in each 'block' of markets. The presence of a systematic real interest rate relationship in the long run is accepted both on a non-EMS and an EMS basis. This relationship proves to be stronger on the EMS basis than on the non-EMS basis; this is probably due to the lower exchange rate volatility within the EMS environment. © 1997 Elsevier Science B.V.