Financial Integration: A New Methodology and an Illustration

Robert Flood () and Andrew Rose

No 4027, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: This Paper develops a simple new methodology to test for asset integration and applies it within and between American stock markets. Our 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. We find that expected risk-free rates vary dramatically over time, unlike short interest rates. Further, the S&P 500 market seems to be well integrated, and the NASDAQ is generally (but not always) integrated. The NASDAQ, however, is poorly integrated with the S&P 500.

Keywords: Risk-free; Rate; Intertemporal; Asset; Market; Expected; Price; Stock; Conditional (search for similar items in EconPapers)
JEL-codes: F32 G15 (search for similar items in EconPapers)
Date: 2003-08
New Economics Papers: this item is included in nep-mfd and nep-rmg
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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Related works:
Journal Article: Financial Integration: A New Methodology And An Illustration (2005)
Working Paper: Financial Integration: A New Methodology and An Illustration (2004)
Working Paper: Financial Integration: A New Methodology and an Illustration (2003)
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