Financial Integration: A New Methodology and an Illustration
AbstractThis Paper develops a simple new methodology to test for asset integration and applies it within and between American stock markets. Our 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. We find that expected risk-free rates vary dramatically over time, unlike short interest rates. Further, the S&P 500 market seems to be well integrated, and the NASDAQ is generally (but not always) integrated. The NASDAQ, however, is poorly integrated with the S&P 500.
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Bibliographic InfoPaper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 4027.
Date of creation: Aug 2003
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Other versions of this item:
- Robert P. Flood & Andrew K. Rose, 2005. "Financial Integration: A New Methodology And An Illustration," Journal of the European Economic Association, MIT Press, vol. 3(6), pages 1349-1359, December.
- Robert P. Flood & Andrew K. Rose, 2003. "Financial Integration: A New Methodology and an Illustration," NBER Working Papers 9880, National Bureau of Economic Research, Inc.
- F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
- G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
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