Less is More: Testing Financial Integration Using Identification-Robust Asset Pricing Models

40 Pages Posted: 16 Aug 2013 Last revised: 29 Jul 2016

See all articles by Marie-Claude Beaulieu

Marie-Claude Beaulieu

Laval University - Centre de recherche en économie et finance appliquée (CRÉFA)

Marie-Hélène Gagnon

Université Laval - Faculté d'Administration

Lynda Khalaf

Carleton University

Date Written: July 16, 2016

Abstract

We revisit financial market integration and study the impact of multiple risk factors and model specification on inference. Our tests exploit a method correct in finite sample that jointly assesses coefficient significance and detects identification problems. Results on four countries show that multiple sources of risk in international asset pricing models lead to lack of identification and spurious inference. We find that domestic factor models are well identified which is not the case for global and international models. Nonetheless, domestic models do not provide a base for testing financial market integration. Given that constraint, the best-identified international model includes few factors and reveals that financial integration varies over time and across countries.

Keywords: International asset pricing, financial integration, identification, exact inference

JEL Classification: F3, G15

Suggested Citation

Beaulieu, Marie-Claude and Gagnon, Marie-Hélène and Khalaf, Lynda, Less is More: Testing Financial Integration Using Identification-Robust Asset Pricing Models (July 16, 2016). Journal of International Financial Markets, Institutions and Money, Forthcoming, Available at SSRN: https://ssrn.com/abstract=2310805 or http://dx.doi.org/10.2139/ssrn.2310805

Marie-Claude Beaulieu

Laval University - Centre de recherche en économie et finance appliquée (CRÉFA) ( email )

Pavillon Palasis-Prince
Quebec G1K 7P4
Canada

Marie-Hélène Gagnon (Contact Author)

Université Laval - Faculté d'Administration ( email )

Quebec G1K 7P4
Canada

Lynda Khalaf

Carleton University ( email )

1125 colonel By Drive
Ottawa, Ontario K1S 5B6
Canada

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