Financial Integration: A New Methodology and an Illustration

23 Pages Posted: 5 Aug 2003 Last revised: 1 Jan 2023

See all articles by Robert P. Flood

Robert P. Flood

International Monetary Fund (IMF) - Research Department; CENTRUM Business School; National Bureau of Economic Research (NBER)

Andrew Kenan Rose

University of California - Haas School of Business; NUS Business School; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR)

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Date Written: August 2003

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. However, the NASDAQ is poorly integrated with the S&P 500.

Suggested Citation

Flood, Robert P. and Rose, Andrew Kenan and Rose, Andrew Kenan, Financial Integration: A New Methodology and an Illustration (August 2003). NBER Working Paper No. w9880, Available at SSRN: https://ssrn.com/abstract=430594

Robert P. Flood

International Monetary Fund (IMF) - Research Department ( email )

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CENTRUM Business School

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National Bureau of Economic Research (NBER)

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Andrew Kenan Rose (Contact Author)

NUS Business School ( email )

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University of California - Haas School of Business ( email )

Berkeley, CA 94720
United States
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HOME PAGE: http://faculty.haas.berkeley.edu/arose

National Bureau of Economic Research (NBER)

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Cambridge, MA 02138
United States

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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