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The Integration of Financial Markets and the Conduct of Monetary Policies: The Case of Canada and the United States

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Abstract

This paper gauges the international integration hypothesis, i.e. risk-adjusted anticipated returns are identical, even when financial instruments are traded in different countries. This hypothesis is verified by testing the equality between domestic and foreign risk prices induced by a multi-factor analytic specification. The maximum likelihood and Kalman filter estimates are used to assess the national risk prices and interpret the factors. Empirically, the integration of Canadian and U.S. financial markets depends crucially on the risk prices associated with a factor capturing switches in monetary regimes. This finding is contrary to the conventional wisdom that the globalization of capital markets leads to their integration.

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Bibliographic Info

Paper provided by CREFE, Université du Québec à Montréal in its series Cahiers de recherche CREFE / CREFE Working Papers with number 67.

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Length: 26 pages
Date of creation: Jan 1999
Date of revision:
Handle: RePEc:cre:crefwp:67

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Keywords: Conditional Heteroscedasticity; Kalman Filter; Maximum Likelihood; Monetary Regimes; Prices of Risk; Unspecified Factors.;

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References

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Cited by:
  1. Michel Normandin & Louis Phaneuf, 2003. "Monetary Policy Shocks: Testing Identification Conditions Under Time-Varying Conditional Volatility," Cahiers de recherche 03-04, HEC Montréal, Institut d'économie appliquée.

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