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Financial Integration

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Author Info

  • Andrew K. Rose
  • Robert P. Flood

Abstract

This 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 Info

Paper provided by International Monetary Fund in its series IMF Working Papers with number 04/110.

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Length: 20
Date of creation: 01 Jun 2004
Date of revision:
Handle: RePEc:imf:imfwpa:04/110

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Related research

Keywords: Financial assets; Stock markets; Risk premium; Economic models; nasdaq; equation; covariance; bootstrap; statistics; covariances; statistic; equations; arbitrage pricing theory; standard error; samples; confidence interval; econometrics; short interest; expected returns; time series; free parameter; sensitivity analysis; statistical techniques; probability; perturbations; survey; confidence intervals; prediction; autocorrelation;

This paper has been announced in the following NEP Reports:

References

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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. 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.
  3. Lars Peter Hansen & Ravi Jagannathan, 1990. "Implications of security market data for models of dynamic economies," Discussion Paper / Institute for Empirical Macroeconomics 29, Federal Reserve Bank of Minneapolis.
  4. G. Andrew Karolyi & Rene M. Stulz, 2002. "Are Financial Assets Priced Locally or Globally?," NBER Working Papers 8994, National Bureau of Economic Research, Inc.
  5. Bekaert, Geert & Harvey, Campbell R, 1995. " Time-Varying World Market Integration," Journal of Finance, American Finance Association, vol. 50(2), pages 403-44, June.
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Cited by:
  1. Martin D. D. Evans & Viktoria Hnatkovska, 2005. "International Capital Flows, Returns and World Financial Integration," NBER Working Papers 11701, National Bureau of Economic Research, Inc.

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