Pozzi, L. and Berger, T. (2013). Measuring time-varying financial market integration: an unobserved component approach Journal of Banking and Finance, 37(2):463--473.

We measure the time-varying degree of world stock market integration of five developed countries (Germany, France, UK, US, and Japan) over the period 1970:1-2011:10. Time-varying financial market integration of each country is measured through the conditional variances of the country-specific and common international risk premiums in equity excess returns. The country-specific and common risk premiums and their conditional variances are estimated from a latent factor decomposition through the use of state space methods that allow for GARCH errors. Our empirical results suggest that stock market integration has increased over the period 1970:1-2011:10 in all countries but Japan. And while there is a structural increase in stock market integration in four out of five countries, all countries also exhibit several shorter periods of disintegration (reversals), i.e. periods in which country-specific shocks play a more dominant role. Hence, stock market integration is measured as a dynamic process that is fluctuating in the short run while gradually increasing in the long run.