The Integration of Financial Markets and the Conduct of Monetary Policies: The Case of Canada and the United States
This paper gauges the international integration hypothesis, i.e. risk-adjusted anticipated returns are identical, even when financial instruments are traded in different countries. This hypothesis is verified by testing the equality between domestic and foreign risk prices induced by 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 associated with a factor capturing switches in monetary regimes. This finding is contrary to the conventional wisdom that the globalization of capital markets leads to their integration.
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