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Equity Integration in Japan: An Application of a New Method

Author

Listed:
  • Rose, Andrew-K

    (U CA, Berkeley and CEPR)

Abstract

This paper develops a simple new methodology to test for asset integration and applies it to the Japanese stock market as represented by the Tokyo Stock Exchange (TSE). The technique is tightly based on a general intertemporal asset-pricing model, and 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 are equal across (risk-adjusted) assets. Assets are allowed to have general risk characteristics, and are constrained only by a factor model of covariances over short time periods. The technique is undemanding in terms of both data and estimation. I find that expected risk-free rates vary dramatically over time, unlike short-term interest rates. Further, the TSE does not always seem to be well integrated in the sense that different portfolios of stocks are priced with different implicit risk-free rates.

Suggested Citation

  • Rose, Andrew-K, 2004. "Equity Integration in Japan: An Application of a New Method," Monetary and Economic Studies, Institute for Monetary and Economic Studies, Bank of Japan, vol. 22(2), pages 1-17, May.
  • Handle: RePEc:ime:imemes:v:22:y:2004:i:2:p:1-17
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    File URL: http://www.imes.boj.or.jp/research/papers/english/me22-2-1.pdf
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    References listed on IDEAS

    as
    1. Hansen, Lars Peter & Jagannathan, Ravi, 1991. "Implications of Security Market Data for Models of Dynamic Economies," Journal of Political Economy, University of Chicago Press, vol. 99(2), pages 225-262, April.
    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. Chen, Zhiwu & Knez, Peter J, 1995. "Measurement of Market Integration and Arbitrage," Review of Financial Studies, Society for Financial Studies, vol. 8(2), pages 287-325.
    4. Robert P. Flood & Andrew K. Rose, 2005. "Financial Integration: A New Methodology And An Illustration," Journal of the European Economic Association, MIT Press, vol. 3(6), pages 1349-1359, December.
    5. 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.
    Full references (including those not matched with items on IDEAS)

    More about this item

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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