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Canadian and U.S. Financial Markets: Testing the International Integration Hypothesis Under Time-Varying Conditional Volatility

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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. Under time-varying conditional volatility, this hypothesis can be tested by verifying the equality between domestic and foreign risk prices associated with 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 of two factors, which seem intimately related to certain nonmonetary events and to the conduct of monetary policies.

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Paper provided by HEC Montréal, Institut d'économie appliquée in its series Cahiers de recherche with number 03-08.

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Length: 34 pages
Date of creation: Nov 2003
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Handle: RePEc:iea:carech:0308

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Postal: Institut d'économie appliquée HEC Montréal 3000, Chemin de la Côte-Sainte-Catherine Montréal, Québec H3T 2A7
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Keywords: Conditional Heteroscedasticity; Kalman Filter; Maximum Likelihood; Monetary Policies; Prices of Risk; Unspecified Factors.;

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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, CIRPEE 0337, CIRPEE.
  2. Hafedh Bouakez & Michel Normandin, 2008. "Fluctuations in the Foreign Exchange Market: How Important are Monetary Policy Shocks?," Cahiers de recherche, CIRPEE 0818, CIRPEE.
  3. Chrétien, Stéphane & Coggins, Frank, 2009. "Election outcomes and financial market returns in Canada," The North American Journal of Economics and Finance, Elsevier, Elsevier, vol. 20(1), pages 1-23, March.

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