Canadian and U.S. Financial Markets: Testing the International Integration Hypothesis Under Time-Varying Conditional Volatility

21 Pages Posted: 15 Oct 2004

See all articles by Michel Normandin

Michel Normandin

HEC Montreal - Institute of Applied Economics

Abstract

This paper evaluates the international integration hypothesis, that is, that risk-adjusted anticipated returns are identical, even when financial instruments are traded in different countries. Under time-varying conditional volatility, this hypothesis is tested by verifying the equality between domestic and foreign risk prices associated with 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 on the risk prices of two factors, which are related to certain non-monetary events and to the conduct of monetary policies.

JEL Classification: G15, C32

Suggested Citation

Normandin, Michel, Canadian and U.S. Financial Markets: Testing the International Integration Hypothesis Under Time-Varying Conditional Volatility. Canadian Journal of Economics Vol. 37, No. 4, pp. 1021-1041, November 2004, Available at SSRN: https://ssrn.com/abstract=605131

Michel Normandin (Contact Author)

HEC Montreal - Institute of Applied Economics ( email )

3000, ch. de la Côte-Ste-Catherine
Montréal, Quebec H3T 2A7
Canada

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