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Testing Financial Integration: Finite Sample Motivated Mothods

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  • Marie-Claude Beaulieu

    (Université Laval)

  • Lynda Khalaf

    (Université Laval)

  • Marie-Hélène Gagnon

    ()
    (Université Laval)

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    Abstract

    This paper examines financial market integration in North-America from January 1984 to December 2003, using two basic CAPM and APT test models. We introduce a methodology valid in finite samples for the CAPM model. A pivotal statistic is introduced to correct for the so-called dimensionality curse which affects the critical points of the LR test statistic under the null hypothesis. When using this methodology, the null hypothesis of integration is strongly rejected for all sub-periods. Our results differ from those obtained in previous studies such as Mittoo (1992) using an asymptotic methodology. Next, an APT model with pre specified factors is used in order to test the null hypothesis of integration. The factors used are the Fama and French factors. In the latter two-pass test context, we introduce a split sample methodology in order to correct for the pre-estimation of BETAS. Moreover, we consider (and form) Fama and French factors for Canada for the 1984-2003 period. With this methodology, we again strongly reject the hypothesis of integration except for two sub-periods. Fama and French factors appear to have a different effect on the Canadian and American stock returns

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    File URL: http://repec.org/sce2006/up.5040.1140796676.pdf
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    Bibliographic Info

    Paper provided by Society for Computational Economics in its series Computing in Economics and Finance 2006 with number 233.

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    Date of creation: 04 Jul 2006
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    Handle: RePEc:sce:scecfa:233

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    Related research

    Keywords: market integration; finite sample methods;

    This paper has been announced in the following NEP Reports:

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    1. Dufour, J.M. & Khalaf, L., 2000. "Simulation-Based Finite and Large Sample Tests in Multivariate Regressions," Cahiers de recherche 2000-10, Centre interuniversitaire de recherche en économie quantitative, CIREQ.
    2. Black, Fischer, 1972. "Capital Market Equilibrium with Restricted Borrowing," The Journal of Business, University of Chicago Press, vol. 45(3), pages 444-55, July.
    3. Shanken, Jay, 1986. " Testing Portfolio Efficiency When the Zero-Beta Rate Is Unknown: A Note," Journal of Finance, American Finance Association, vol. 41(1), pages 269-76, March.
    4. Khalaf, Lynda & Saphores, Jean-Daniel & Bilodeau, Jean-Francois, 2003. "Simulation-based exact jump tests in models with conditional heteroskedasticity," Journal of Economic Dynamics and Control, Elsevier, vol. 28(3), pages 531-553, December.
    5. Beaulieu, Marie-Claude & Dufour, Jean-Marie & Khalaf, Lynda, 2007. "Multivariate Tests of MeanVariance Efficiency With Possibly Non-Gaussian Errors: An Exact Simulation-Based Approach," Journal of Business & Economic Statistics, American Statistical Association, vol. 25, pages 398-410, October.
    6. Gultekin, Mustafa N & Gultekin, N Bulent & Penati, Alessandro, 1989. " Capital Controls and International Capital Market Segmentation: The Evidence from the Japanese and American Stock Markets," Journal of Finance, American Finance Association, vol. 44(4), pages 849-69, September.
    7. John Y. Campbell & Yasushi Hamao, 1989. "Predictable Stock Returns in the United States and Japan: A Study of Long-Term Capital Market Integration," NBER Working Papers 3191, National Bureau of Economic Research, Inc.
    8. Chan, K. C. & Karolyi, G. Andrew & Stulz, ReneM., 1992. "Global financial markets and the risk premium on U.S. equity," Journal of Financial Economics, Elsevier, vol. 32(2), pages 137-167, October.
    9. Jean-Marie Dufour, 2003. "Identification, Weak Instruments and Statistical Inference in Econometrics," CIRANO Working Papers 2003s-49, CIRANO.
    10. Dufour, Jean-Marie & Jasiak, Joann, 2001. "Finite Sample Limited Information Inference Methods for Structural Equations and Models with Generated Regressors," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 42(3), pages 815-43, August.
    11. Jorion, Philippe & Schwartz, Eduardo, 1986. " Integration vs. Segmentation in the Canadian Stock Market," Journal of Finance, American Finance Association, vol. 41(3), pages 603-14, July.
    12. George Koutoulas & Lawrence Kryzanowski, 1994. "Integration or Segmentation of the Canadian Stock Market: Evidence Based on the APT," Canadian Journal of Economics, Canadian Economics Association, vol. 27(2), pages 329-51, May.
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