Financial Market Integration Over the Long Run: Is there a U-shape?

I show that the principal components analysis can be used to quantify the degree of economic integration, trace its evolution over time, and capture episodes of market segmentation. Based on long series of sovereign bond data for fifteen industrialized economies I document clear evidence of higher financial markets integration at the end of the 20th century compared to the earlier periods (J -shaped trend with a trough as early as the 1920s). Countries’ sovereign bond markets were much more segmented prior to World War I than in the following periods.