Financial Integration: A New Methodology and An Illustration

June 1, 2004

Preview Citation

Format: Chicago

Andrew K. Rose, and Robert P Flood. Financial Integration: A New Methodology and An Illustration, (USA: International Monetary Fund, 2004) accessed November 21, 2024

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

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.

Subject: Asset prices, Econometric analysis, Factor models, Financial institutions, Financial markets, Prices, Stock markets, Stocks, Time series analysis

Keywords: Asset, Asset prices, Conditional, Cross-market condition, Expected, Factor models, Intertemporal, Market, NASDAQ market, NASDAQ portfolio, Open-economy asset-market integration concept, Portfolio variance, Price, Rate, Risk-free, Standard and Poor's, Stock, Stock markets, Stocks, Time series analysis, WP

Publication Details

Pages:

20
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2004/110
Stock No:

WPIEA1102004
ISBN:

9781451853377
ISSN:

1018-5941

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