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Equity Integration in Japan: An Application of a New Method

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  • Rose, Andrew-K

    (U CA, Berkeley and CEPR)

Abstract

This paper develops a simple new methodology to test for asset integration and applies it to the Japanese stock market as represented by the Tokyo Stock Exchange (TSE). The technique is tightly based on a general intertemporal asset-pricing model, and relies on estimating and comparing expected risk-free rates across assets. Expected risk-free rates are allowed to vary freely over time, constrained only by the fact that they are equal across (risk-adjusted) assets. Assets are allowed to have general risk characteristics, and are constrained only by a factor model of covariances over short time periods. The technique is undemanding in terms of both data and estimation. I find that expected risk-free rates vary dramatically over time, unlike short-term interest rates. Further, the TSE does not always seem to be well integrated in the sense that different portfolios of stocks are priced with different implicit risk-free rates.

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Bibliographic Info

Article provided by Institute for Monetary and Economic Studies, Bank of Japan in its journal Monetary and Economic Studies.

Volume (Year): 22 (2004)
Issue (Month): 2 (May)
Pages: 1-17

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Handle: RePEc:ime:imemes:v:22:y:2004:i:2:p:1-17

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  1. Fama, Eugene F & French, Kenneth R, 1996. " Multifactor Explanations of Asset Pricing Anomalies," Journal of Finance, American Finance Association, vol. 51(1), pages 55-84, March.
  2. Lars Peter Hansen & Ravi Jagannathan, 1990. "Implications of Security Market Data for Models of Dynamic Economies," NBER Technical Working Papers 0089, National Bureau of Economic Research, Inc.
  3. Flood, Robert P & Rose, Andrew K, 2003. "Financial Integration: A New Methodology and an Illustration," CEPR Discussion Papers 4027, C.E.P.R. Discussion Papers.
  4. Roll, Richard & Ross, Stephen A, 1980. " An Empirical Investigation of the Arbitrage Pricing Theory," Journal of Finance, American Finance Association, vol. 35(5), pages 1073-1103, December.
  5. Chen, Zhiwu & Knez, Peter J, 1995. "Measurement of Market Integration and Arbitrage," Review of Financial Studies, Society for Financial Studies, vol. 8(2), pages 287-325.
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