AbstractThis paper develops a simple methodology to test for asset integration, and applies it within and between American stock markets. Our technique 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 must be equal across (risk-adjusted) assets in well integrated markets. Assets are allowed to have standard risk characteristics, and are constrained by a factor model of covariances over short time periods. We find that implied expected risk-free rates vary dramatically over time, unlike short interest rates. Further, internal integration in the S&P 500 market is never rejected and is generally not rejected in the NASDAQ. Integration between the NASDAQ and the S&P, however, is always rejected dramatically.
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Bibliographic InfoPaper provided by International Monetary Fund in its series IMF Working Papers with number 04/110.
Date of creation: 01 Jun 2004
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This paper has been announced in the following NEP Reports:
- NEP-ALL-2005-10-22 (All new papers)
- NEP-CFN-2005-10-22 (Corporate Finance)
- NEP-FIN-2005-10-22 (Finance)
- NEP-FMK-2005-10-22 (Financial Markets)
- NEP-SEA-2005-10-22 (South East Asia)
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