Governmen Bond Marke Inegraion of New EU Member Saes Jiri Chaloupka Absra In his paper we examine he level and dynami of inegraion of he governmen bond markes of he new EU member saes wih he German marke. We analyze ineres raes on 10-year governmen bonds during he period 2001 2011 using he same mehodology as he European Cenral Bank, i.e. prie-based and news-based indiaors. We found ou ha during imes of eonomi sabiliy he markes onverged o Germany, whereas during imes of eonomi slowdown he markes diverged. However, here exis subsanial differenes among he new EU member saes. Basially, Hungarian and Romanian level of onvergene was he lowes, whereas he Czeh level of onvergene was he highes. Index Terms Cenral and Easern Europe, EU, finanial risis, finanial inegraion, governmen bonds. I. INTRODUCTION Governmen bonds play an essenial role in all developed eonomies. They serve as a main soure of finaning for governmens and enral banks use (shor-erm) governmen seuriies as he primary means of implemening moneary poliy. Governmen bonds are also used as benhmark asses when priing oher seuriies, as hey are pereived (a leas before he Greek risis) as risk-free asses. They also failiae he finanial sysem funion as hey are frequenly used as ollaeral in various finanial ransaions. Governmen bonds, herefore, reae an imporan asse in porfolios of finanial insiuions. During he las few years he world has winessed how imporan hese asses are for he real eonomy due o he sovereign deb risis in European Union (hereinafer referred o as he EU ). Prior o he US subprime risis of 2007 spreads on governmen bonds of euro area (hereinafer also referred o as he EMU ) ounries were very narrow as hese bonds were broadly onsidered as safe asses. Unforunaely, risks were signifianly underesimaed. The US subprime risis of 2007 revealed he previously aumulaed imbalanes and misalulaions of risk whih pu solveny of many banks ino quesion. Moreover, ounries were onfroned wih delines in ax revenues and inreased expendiures due o os of supporing banks. The differenes beween eonomies of he EU ame o he surfae and markes quesioned he apaiy of he auhoriies o mainain he susainabiliy of publi finanes. Spreads beween ounries sared o inrease. The deb risis hi he whole EU in 2010 as he finanial Manusrip reeived Sepember 20, 2012; revised Oober 25, 2012. Jiri Chaloupka is wih he Fauly of Inernaional Relaions, Universiy of Eonomis, Prague, Czeh Republi (e-mail: jiri.haloupka@vse.z). seor had invesed in bonds of Greee and oher periphery ounries and oday, he EU has o fae severe risis as he finanial risis spreads hroughou he EU. Inegraion of finanial markes failiaed he free flow of apial prior o he risis whih helped o fuel he boom-and-bus yle in some ounries [1]. The risis also revealed ha inegraion was far from omplee in many markes and was no mahed by he appropriae supervisory sruures. For his reason, he European Cenral Bank regularly analyses he level of onvergene of he governmen bond markes in he euro area. Aording o ECB [2], finanial markes are perfely inegraed if he law of one prie holds and hus, he ineres raes equal for bonds of all ounries. However, he inegraion wih euro area is imporan also for he new EU member saes (hereinafer referred o as NMS ) as hey are supposed o adop he euro. In he ase of imperfe inegraion of NMS afer he adopion of he euro, he moneary poliy of ECB migh be ineffeive or i an even have negaive impa on NMS. Thus, he aim of his paper is o measure he level of onvergene of he NMS governmen bond markes o he EMU, o analyse he dynamis of he inegraion proess and o idenify he main faors ha influened his proess. The analysis is based on exaly he same mehodology as he one ha ECB uses. II. LITERATURE REVIEW One of he firs sudies ha invesigaed he inegraion of bond markes of he NMS were ha of Pungulesu [3] and Dvorak and Geirega [4]. They analysed he dynamis of ineres rae spreads beween eigh NMS and he euro area and repored oninuing derease of he margins over ime. Dvorak and Geirega [4] also sudied he impa of loal and ommon faors as deerminans of equiy reurns in NMS. They found ha he role of ommon faors has inreased over ime whih suggess deeper inegraion. However, hese auhors also poined ou ha deerioraion of he fisal siuaion in Poland and Hungary led o widening of ineres rae spreads in mid-2003 whih is a proof ha he inegraion proess is no irreversible. Reininger and Walko [5] analysed yield spreads and orrelaions beween Czeh, Polish and Hungarian bonds and German bonds during he period 2000 2005. They ompared he developmen of yields o ha of Greee, Porugal, Ialy and Spain before hey adoped he euro. They found ou ha he mos inegraed is he Czeh marke as is yields followed he same paern as ha of he Medierranean ounries. The Hungarian marke, on he oher hand, is he less inegraed. DOI: 10.7763/IJTEF.2012.V3.248 472
They also showed ha inegraion beween he NMS and he euro area has evolved hrough hree phases: he bull period 2000-2003 haraerized by a sharp spread onraion, he bear period 2003-2004 of spread widening, and he seond bull period 2004-2005, again marked by spread onraion. This ylial paern has also been doumened in [4]. Kim e al. [6] analysed ime-varying properies of he governmen bond marke inegraion using dynami oinegraion and ime-varying ondiional orrelaion. Conrary o [5], hey found only weak linkages beween NMS and euro area and, moreover, hey showed ha hose linkages are no srenghening over ime. Surprisingly, hey repor ha he Czeh Republi is he leas inegraed due o high urreny risks. Capiello e al. [7] used he same sample of ounries (i.e. he Czeh Republi, Poland and Hungary) and he same period, bu analysed GDP-weighed average probabiliies of o-movemens beween hese markes and Germany. Their resul was ha while he Czeh Republi exhibis a signifian probabiliy inrease, he remaining wo ounries do no, whih is in onras o findings in [6]. Poghosyan [8] used a hreshold oinegraion mehodology o ake ino aoun he possibiliy of disoninuous adjusmen o he long-run equilibrium due o marke friions. The auhor repors ha finanial markes in NMS beame gradually more inegraed wih he euro area. However, he degree of inegraion differs aross finanial segmens whereas money markes are he mos inegraed ones, loan markes are he leas inegraed ones. Balzer e al. [9] sudied spreads beween 10-year governmen bond yields of he Czeh Republi, Poland, Hungary, Slovakia, Cyprus, Mala and Slovenia and Germany wih he resul ha for he period 2000 2006 mos of he new EU ounries have onverged o Germany. Also he dispersion in yield spreads dereased over ime from 300 basis poins a he beginning of 2001 o abou 50 basis poins in 2006. They also uilized he regression analysis o invesigae reaions of hese markes o shoks in he German benhmark. They onluded ha for he Czeh Republi, Hungary and Poland, he slope oeffiiens fluuaed around one whereas, for he oher eonomies slope oeffiiens ended o be lose o zero. Gardóand Marin [10] poined ou ha afer he fall of Lehman Brohers governmen bond spreads inreased hroughou NMS. However, his effe differed among NMS. In he ourse of 2009, spreads have ome down onsiderably bu were sill learly above pre-risis levels. Yield spreads remained a elevaed levels, noably in Romania, Lavia and Lihuania whereas spreads on Polish bonds remained relaively ompressed. Abad e al. [11] used an asse priing model proposed by Bekaer and Harvey [12]. For he period 2004 2009 hey invesigaed relaive imporane of ounry omponens versus oher faors in explaining bond reurns of boh old and new EU member saes. Throughou he period, he level of inegraion of new EU ounries was slighly lower han ha of he majoriy of old EU ounries. In 2007, markes beame more segmenaion and he differeniaion of ounry risk faors inreased subsanially aross ounries. However, he impa of he finanial and eonomi risis has been muh more harmful for euro area sine i has signifianly slowed heir inegraion. Chrisiansen [13] invesigaed he ime variaion in he inegraion by measuring he explanaory power of European faor porfolios for he individual bond markes for eah year. The auhor onludes ha he inegraion was sronger for EMU han non-emu members and sronger for old han new EU members. ECB regularly publishes repor on finanial inegraion in EMU whih is based on models suggesed by Adam e al. [14] and Baele e al. [15]. Aording o ECB [2] high ross-border o-movemens signal he presene of ommon driving faors among EMU markes prior o 2007. Afer 2007, he number of faors behind he sovereign yield movemens inreased. Pried-based measures indiae ha for euro area sovereign bond markes ounry-level effes beame more imporan in driving yield developmens. However, he heerogeneiy in EMU bond markes is sill lower han in he period before he inroduion of he euro. The mehodology of he ECB has been adoped by he Czeh Naional Bank (hereinafer referred o as he CNB ) whih regularly analyzes he level of inegraion of he Czeh Republi, Slovakia, Hungary and Poland. In [16], he enral bank saes ha ill 2008 he speed and onvergene o EMU marke was relaively high. The following finanial risis, however, led o divergene. III. METHODOLOGY In his paper he inegraion of 10-year governmen bond markes is invesigaed for he period 2001 2011. The new EU member saes analysed are he Czeh Republi (CZ), Slovakia (SK), Poland (PL), Hungary (HU), Slovenia (SI), Lavia (LV), Lihuania (LT), Bulgaria (BG) and Romania (RO). As here are no Esonian sovereign deb seuriies, his ounry was no inluded in he analysis. As a benhmark, he German bond marke was seleed. The mehodology used in his paper is he same as suggesed in [14], [15] and [17] and whih is used by he ECB for measuring of inegraion of he euro area. The ECB uses hree aegories of indiaors prie-based, news-based and quaniaive-based indiaors. In his paper, he prie-based and news-based indiaors are adoped. Prie-based indiaors sem from he law of one prie, whih as menioned above, should hold in fully inegraed finanial markes. The simples way o prove he validiy of he law of one prie is o direly ompue spreads beween naional bond ineres raes and he benhmark bond ineres rae: where p i i (1) p is he spread (differene) beween he ineres rae i in ounry a ime and he ineres rae ib, b, in benhmark ounry b a ime. The higher he differene, he less inegraed he marke is, and vie versa. However, also he speed of diminishing of hese differenes an be measured. For his purpose, Goldberg and Verboven [18] proposed o use he uni roo es wih panel 473
daa. The basi onvergene equaion an be expressed as: 1 L p p p (2) l 1 l l where p, is he firs differene of he spread of ounry a ime, is he ounry speifi onsan whih apures ounry fixed effes ha aoun for non-ime dependen differenes aross ounries, denoes he speed of onvergene and is he ime dependen error erm. The number of lags L was deermined by op-down approah saring wih 8 lags. The equaion was hen repeaedly re-esimaed unil -saisi of he longes lag equaled 1.96. Under he null hypohesis of non-onvergene, he parameer equals zero as he shok o is permanen. p On he oher hand, large and negaive implies onvergene as he shok vanishes over ime. The larger he oeffiien, he faser he shok vanishes and he higher he speed of onvergene is. Moreover, he approximae half-life of shok an be alulaed as ln(2)/ln(1+β). News-based measures are based on he assumpion ha bond ineres raes should rea only o news ommon o he whole marke beause loal shoks an be easily diversified by invesing in asses from oher ounries and herefore do no onsiue a sysemai risk. The news-based measures, herefore, measure he proporion of ineres raes hanges ha an be explained by ommon news. Changes in ineres raes of a benhmark asse serve as a proxy for he ommon news. These hanges should herefore explain he hanges in ineres raes in naional markes. To measure his relaion, he ECB uses he following regression equaion suggesed in [15]: i i (3) where i represens a hange in ineres raes of asse for he ounry a he ime, i is he hange in ineres raes of he b, benhmark asse a he ime, is a onsan and, represens a speifi shok for he ounry a he ime. In a fully inegraed finanial marke, a) b, should equal, o 0, b) should equal o 1 and ) a proporion of variane: he slope oeffiiens may differ from one even under full inegraion. The proporion of loal variane explained by he ommon faor VR an serve as anoher measure of inegraion. However, he variane raio VR, is no only posiively relaed o gamma bu also o he relaive size of volailiy in he benhmark and loal bond marke. Therefore, if he variane raio is lose o one, he reason migh be ha he benhmark bond ineres rae hanges are no of similar magniude whih an be resul of differenes in liquidiy of hese markes. Low liquidiy is ofen problem of NMS markes. In his paper, daa from he ECB Saisial Daa Warehouse were used. Informaion on hanges in redi raings was drawn from he daabase of Fih Raings. A. Prie-based Indiaors IV. ANALYSES AND RESULTS Firs, spreads beween German 10-years governmen bond and NMS bonds were invesigaed. These spreads (smoohed by he Hodrik-Preso filer for monhly daa) are presened on fig. 1 and 2. Fig. 1. Spreads beween ineres raes on German and NMS 10-years governmen bonds smoohed by he Ho drik-preso filer for monhly daa (λ = 144,000). VR 2 Var( ib, ) (4) Var( i ) also equal o 1 as he proporion of he variane should be fully explained by he ommon faor. If values of he sensiiviy oeffiien are higher han 1 hen ineres raes of loal asses rea sronger o ommon news han ineres raes of he benhmark asse. If he value of is negaive, hen he response of loal ineres raes is onverse. However, perfe onvergene presupposes idenial sysemai risks aross ounries. This presumpion is srong for governmen bond markes as differenes in redi and liquidiy risks persis in individual markes. Thus, Fig. 2. Spreads beween ineres raes on German and NMS 10-years governmen bonds smoohed by he Hodrik-Preso filer for monhly daa (λ = 144,000). 474
For he period of 2001 2006, he onvergene rend is apparen for all ounries exep for Hungary and Romania. The narrowing of spreads ook plae during he whole period and in he year 2006 spreads did no exeed 1 % for all ounries exep for Hungary, Poland and Romania. This implies srong onvergene rend during he whole period of eonomi growh. Table I presens he esimaion resuls of (2) whih shows he speed of onvergene during he period prior o mid-2007. Please noe, ha Romania, Bulgaria and Slovenia were exluded from his esimaion due o lak of daa. TABLE I: PANEL DATA ESTIMATION OF THE SPEED OF CONVERGENCE DURING 2001-2007 Coeffiien Sd. error -raio p-value α 0.0721 0.0171 4.2146 <0.0001 *** β -0.0664 0.0098-6.7501 <0.0001 *** θ 0.3119 0.0373 8.3612 <0.0001 *** TABLE II: COUNTRY SPECIFIC DUMMIES FOR 2001-2007 Coeffiien Long-erm differenials CY 0.05905 0.88931 MT 0.05550 0.83584 SK 0.05414 0.81536 CZ 0.01199 0.18057 HU 0.19206 2.89247 LT 0.02801 0.42184 LV 0.04324 0.65120 PL 0.13260 1.99699 The oeffiien esimae for equals o -0.0664 wih a -saisi of -6.7501. Aording o [19], he riial values for =100 and N=10 equal o -2.48 a 1% level of onfidene. Based on his resul, he null-hypohesis of non-onvergene an be rejeed. The half-life of a shok is approximaely 10 monhs. Table II displays ounry speifi dummies. By dividing hese values by β, he long-erm sysemai differenials an be obained. These differenials are shown in hird olumn of he able. These resuls onfirm ha prior o mid-2007 signifian long-erm differenials from he German marke persised on markes of Hungary and Poland. As is apparen from fig. 1 and 2, he onvergene rend reversed in mid-2007 and he spreads sared o diverge. This was he ime when he US sub-prime risis broke ou and rediworhiness of sovereigns ame o quesion. On he onrary, German ineres raes gradually dereased due o relaive sabiliy of is eonomy ompared o oher European eonomies. However, he paern of he urn-over was differen among he NMS. Aording o he developmen of he spreads, he NMS an be divided ino wo groups. Bulgaria, Lavia and Lihuania winessed jump in governmen bond ineres raes and sharp inrease was observed also in Hungarian, Polish and Romanian governmen bond ineres raes as is apparen from fig. 2. Res of NMS winessed muh smooher inrease in spreads. Sharpe inrease in spreads of Bali Saes was dire effe of he risis, as hey were among he wors hi by he global finanial risis of 2008. Espeially he Lavian eonomy underwen severe downurn in is GDP and in February 2009 he Lavian governmen asked he Inernaional Moneary Fund (hereinafer refer o as IMF ) and he EU for an emergeny bailou loan. This was a resul of high apial ouflow following he subprime risis in he USA whih led o risis in Lavian banking seor. These faors in ombinaion wih high exernal deb led he raing agenies o downgraded Lavia's redi raing o non-invesmen grade. Also Hungary requesed finanial help from IMF in 2008. Hungary was one of he mos heavily indebed ounries in he region and he ouflow of foreign apial following he fall of Lehman Brohers in 2008 made he finanial seor very weak. Therefore, banks gave fewer loans whih led o a derease in invesmen and furher o eonomi reession. The ounry also faed poliial risis. These faors aused he ouflow of foreign apial and he raing agenies worsened heir raing making he ineres raes inrease. As for Romania, he ounry winessed high foreign apial inflow ill Sepember 2008. Afer he bankrupy of Lehman Brohers, however, he influx sopped and he GDP deerioraed. Thus, he ax revenues dereased and he governmen faed roubles in paying urren expenses so ha in Marh 2009, he governmen was fored o apply for loan from IMF. Also Romanian raing was downgraded and is governmen bond ineres raes inreased subsanially. Muh smooher inrease in he governmen bond spreads afer 2007 was winessed by he Czeh Republi, Slovakia, Slovenia, Cyprus and Mala. These ounries were no hi by he finanial risis direly bu raher hey were affeed by he subsequen eonomi slowdown. Sine April 2011, ineres raes of all NMS exep for Hungary, Slovenia and Cyprus have been gradually dereasing. This migh signal ha he proess of onvergene has been renewed. However, he German ineres raes derease muh faser han ineres raes of any oher NMS ounry. The mos dramai inrease in spreads in 2011 has experiened he Cyprio eonomy as is raing was downgraded below invesmen grade due o is high exposure o Greek banks, a devasaing explosion a is main power plan and slow progress wih fisal and sruural reforms. Cyprio governmen, herefore, has o rely on emergeny loan from Russia o over is budge defii. A he end of 2011, redi raing was also downgraded o non-invesmen grade for Hungarian deb due o is poliial siuaion. Hungarian governmen adoped several onroversial measures, e.g. naionalizaion of pension funds, or limiaion of he Hungarian Naional Bank independene, ha hreaen eonomis prospe of he ounry. Inrease in Slovenian spreads is also resul of poliial faors. Slovenian governmen ollapsed as i was unable o enfore publi spending us and a new pension sheme. Moreover, Slovenian banks have lose ies o Ialian banks. This inreases he risk ha he governmen may need o provide addiional suppor o Slovenia's banking sysem. 475
TABLE III: PANEL DATA ESTIMATION OF THE SPEED OF CONVERGENCE DURING 2007-2011 Coeffiien Sd. error -raio p-value α 0.2535 0.0404 6.2737 <0.0001 *** β -0.0786 0.0124-6.3248 <0.0001 *** θ 1 0.2570 0.0399 6.4453 <0.0001 *** θ 2 0.0550 0.0413 1.3328 0.1831 θ 3 0.1405 0.0499 3.4279 0.0007 *** Aording o able III, he esimae of, i.e. he speed of onvergene of he group as a whole, equaled o -0.0786 wih a -saisi of -6.3248 for he period of risis. Therefore, we an reje he null-hypohesis of non-onvergene for his period as well. The half-life of he shok is approximaely 8.5 monhs. This may sugges sronger onvergene proess during his period. However, hese resuls mus be viewed in ombinaion wih able IV, whih repors ounry speifi dummies and long-erm sysemai differenials. The long-erm differenials were subsanially higher hroughou he period of risis, whih, on he onrary, implies inreased marke segmenaion. The faser speed of onvergene of he whole group, herefore, an be explained by srong divergene afer he fall of Lehman Brohers ha was followed by srong onvergene afer 2009. However, as is apparen from able IV, he segmenaion sill remains higher han in 2006. The mos signifian differenes remain on Lavian, Lihuanian, Hungarian and Romanian marke. TABLE IV: COUNTRY SPECIFIC DUMMIES FOR 2007-2011 Coeffiien Long-erm differenials CY 0.1961049 2.495862 MT 0.1291057 1.643152 SI 0.1382821 1.759941 SK 0.1318537 1.678126 BG 0.2476633 3.152055 CZ 0.1012396 1.288495 HU 0.4291223 5.461517 LT 0.3546612 4.513837 LV 0.4304608 5.478552 PL 0.2429858 3.092524 RO 0.3873906 4.930390 o European Exhange Rae Mehanism II (hereinafer refer o as ERM II ). Sine hen, sensiiviy of Slovak ineres raes o news from Germany inreased subsanially ill 2007. The variane raio on Fig. 4 onfirms hese resuls. However, only for he Czeh Republi he proporion of he variane ha an be explained by he ommon faor exeeded 50%. The res of he NMS did no onverge o German marke prior o 2004, as is apparen from Fig. 5. The group, however, was no homogenous - Mala, Slovenia and Lihuania beame gradually more sensiive o movemens in German raes beween 2004 and 2008, whereas he res of he ounries remained insensiive hroughou he whole period. The reason for inreasing onvergene of Malese, Slovenian and Lihuanian bonds migh be he aession of ERM II as he beginning of he onvergene proess orresponds wih dae of joining he ERM II, i.e. June 2004 for Lihuania, July 2006 for Slovenia and July 2007 for Mala. Inreasing sensiiviy on Fig. 4 along wih diminishing spreads on Fig. 2 denoe inreasing onvergene of hese ounries afer joining he ERM II ill Sepember 2008. Fig. 3. Evoluion of sensiiviy oeffiiens smoohed by he Hodrik-Preso filer (λ = 444) using Germany as benhmark. B. News-Based Indiaors Aording o responses o hanges in German 10-years governmen bond ineres raes, he NMS an be divided ino wo groups as well, as is apparen from fig. 3-6. These figures presen he evoluion of slope oeffiiens from VR, regression (3) and he variane raio as desribed by (4). The wo groups differ in heir level of onvergene during he period 2001 2006. Cenral European ounries (i.e. he Czeh Republi, Slovakia, Poland and Hungary) winessed a proess of seep onvergene during he period prior o heir aession in May 2004 as is presened on fig. 3. A ha ime, he mos sensiive o German marke news was he Czeh Republi whose bonds even over-reaed during 2004. Slovak ineres raes, on he oher hand, remained almos insensiive prior o November 2005, whih orresponds o he dae of aession, Fig. 4. Evoluion of he proporion of variane explained by news from Germany smoohed by he Hodrik-Preso filer (λ = 444). As shown on Fig. 5, afer he fall of Lehman Brohers in Sepember 2008, all he markes of NMS gradually diverged and ended o rea onversely o he developmen in he German marke (exep for Mala and Slovenia). The reason of his opposie reaion is he dereasing rend in German ineres raes. This opposie reaion was remarkable 476
espeially for Bulgaria during 2009. Dereasing sensiiviy orresponds wih inreasing spreads on Fig. 2 and herefore, he period afer Sepember 2008 was marked wih he proess of divergene from he German marke. Comparing esimaes of slope oeffiiens wih he variane raio VR as presened on fig. 6, however, leads o onroversial resuls for Slovakia, Slovenia and Mala. The variane raio for hese ounries inreased subsanially during he period of risis, whereas, he slope oeffiiens remained low. As was said before, he variane raio depends on he value of he slope oeffiien as well as on he volailiy of he pariular ounry ineres raes and he volailiy of he benhmark ineres rae. Therefore, he resuls for Slovenia and Mala are biased as he frequeny of daa is low and hus also he volailiy is lower han he volailiy of he German ineres rae. This is, however, no he ase of Slovakia. I seems ha his marke beame more sensiive o ommon news afer he risis han before. Fig. 7. Evoluion of sensiiviy oeffiiens smoohed by he Hodrik-Preso filer (λ = 444) using Greee as benhmark. Fig. 8. Evoluion of he proporion of variane explained by news from Germany smoohed by he Hodrik-Preso filer (λ = 444). Fig. 5. Evoluion of sensiiviy oeffiiens smoohed by he Hodrik-Preso filer (λ = 444). Fig. 9. Evoluion of sensiiviy oeffiiens smoohed by he Hodrik-Preso filer (λ = 444) using Greee as benhmark. Fig. 6. Evoluion of he proporion of variane explained by news from Germany smoohed by he Hodrik-Preso filer (λ = 444). Resuls sugges ha for he period of risis he hanges in ineres raes were driven purely by loal faors, however, alernaive explanaion an be ha he seleed benhmark (i.e. German ineres rae) did no rea o ommon news. For his reason, in he following analyses he Greek ineres rae was used as a possible benhmark. Fig. 7 and 8 display he evoluion of slope oeffiiens and fig. 9 and 10 he evoluion of he variane raio. As is apparen, he resuls are very similar herefore, Greee an be rejeed as a benhmark. Fig. 10. Evoluion of he proporion of variane explained by news from Germany smoohed by he Hodrik-Preso filer (λ = 444). 477
V. CONCLUSION Comparing he resuls of prie-based and news-based indiaors, we an onlude ha he inegraion proess differs for imes of eonomi sabiliy (i.e. 2001 2006) and for imes of eonomi slowdown (i.e. 2007 2011). During he period of eonomi growh he NMS were onverging o Germany, whereas, during he period of risis he NMS were diverging. In he period of onvergene (i.e. ill 2007), he spreads were dereasing for all ounries bu he sensiiviy o news from German marke was differen among NMS. The Czeh Republi and Poland beame inreasingly sensiive prior heir aession o EU in May 2004 and remained relaively sensiive ill Sepember 2008. Slovakia, Slovenia, Mala and Lihuania beame sensiive afer heir joining of he ERM II bu diverged sine he fall of Lehman Brohers. Cyprus, Bulgaria and Lavia were insensiive o news from German marke. Afer he fall of Lehman Brohers in Sepember 2008, all he NMS diverged from he German marke. The spreads were widening and markes beame insensiive o hanges in German ineres rae. The divergene was sronges for ounries ha were hi by he risis he mos, i.e. Bali ounries, Hungary and Romania. On he oher hand, he Czeh Republi and Poland were hi jus indirely, bu heir level of inegraion dereased subsanially as hey were already on very high level of inegraion. To onlude, he level of inegraion of Hungarian and Romanian marke remained very low for boh periods. On he oher hand, he level of inegraion of he Czeh Republi was high hroughou boh periods. REFERENCES [1] European Commission, European Finanial Sabiliy and Inegraion Repor 2011, Saff Working Doumen, 103 final, Brussels, 2012. [2] ECB, Finanial Inegraion in Europe, Frankfur am Main: ECB, 2012. [3] C. Pungulesu, Measuring Finanial Inegraion in he European Moneary Union: An Appliaion for he Eas European Aession Counries, Working Paper, Spring Meeing of Young Eonomiss, Warsaw, 2003. [4] T. Dvorak and C. Geirega Are he New and Old EU Counries Finanialy Inegraed? Sheneady, NY: Union College, 2004. [5] T. Reininger and Z. 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Monne, Measuring Finanial Inegraion in he Euro Area, Oxford Review of Eonomi Poliy, vol. 20, no. 4, 2004, pp. 509-530. [16] CNB, Analýzy supně ekonomiké sladěnosi České republiky s eurozónou 2011, Prague: Czeh Naional Bank, 2011. [17] K. Adjaouéand J. P. Danhine, European Finanial Inegraion and Equiy Reurns: A Theory-Based Assessmen, V. Gaspar e al. The ransformaion of he European finanial sysem, Frankfur am Main: ECB, 2003. [18] P. K. Goldberg and F. Verboven, Marke inegraion and onvergene o he Law of One Prie: evidene from he European ar marke, Journal of Inernaional Eonomis, Elsevier, vol. 65, no. 1, pp. 49-73, January, 2005. [19] A. Levin and C. Lin, Uni Roo Tess in Panel Daa: Asympoi and Finie-Sample Properies, unpublished manusrip, Universiy of California, San Diego Disussion Paper, pp. 92-23, May 1992. J. Chaloupka was born in 1985, he is a Ph.D. suden a he Deparmen of Inernaional Trade, Fauly of Inernaional Relaions, Universiy of Eonomis, Prague. He reeived his maser s degree in Inernaional Trade from he Universiy of Eonomis in Prague in 2010 and his maser s degree in Laws from he Charles Universiy in Prague in 2011. The auhor also spen one semeser a he KU Leuven where he sudied asse priing, inernaional finane and eonomeris. During his professional arrier, Mr. Chaloupka gained experiene from several privaely held finanial insiuions. The auhor s researh ineress inlude inernaional finane and regulaion of finanial markes. Mr. Chaloupka published several ariles onerning he inegraion of finanial markes and heir regulaion. 478