Financial Asset Integration Andrew K. Rose and Robert P. Flood All materials (data sets, programs, papers, slides) at:

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Presentation transcript:

Financial Asset Integration Andrew K. Rose and Robert P. Flood All materials (data sets, programs, papers, slides) at:

Two Objectives: 1.Derive new methodology to assess integration of assets across instruments/borders/markets, etc. 2.Illustrate technique empirically

Definition of Asset Integration

Key:

Empirical Strategy

Impose Two (Reasonable?) Assumptions for Estimation:

Now We Have an Estimable Panel Equation:

Why this Strategy?

Are Assumptions Reasonable?

Strengths of Methodology

Differences with Literature

Most Importantly, don’t impose bond market integration

Illustration #1: American Equity Data

Notes

Data Characteristics

Shadow Discount Rates

Likelihood-Ratio (Joint) Test for Asset Integration

Broadening the Sample

Add Different Asset Classes

NASDAQ is usually (not always) integrated

More Interesting: NASDAQ is never integrated with the S&P

Sensitivity Analysis

In fact, Time-Varying Factors Make Little Difference!

Illustration #2: Tokyo Stock Exchange

Explore Importance of Grouping

Shadow Discount Rates

Likelihood-Ratio (Joint) Test for Asset Integration

TSE is not always integrated!

Sensitivity Analysis

Illustration #3: NYSE during the LTCM Crisis

Portfolios

Shadow Discount Rates

Likelihood-Ratio (Joint) Test for Asset Integration

NYSE is not integrated after LTCM/Russia Crisis

Illustration #4: The Asian Crisis of 1997

Portfolios

Again:

Likelihood-Ratio (Joint) Test for Asset Integration

Tokyo and Seoul are never integrated!

Illustration #5: American Securities

American Stocks and Bonds are not Integrated!

Deltas are uncorrelated with Stock Market and T-bill returns!

Illustration #6: August 21, 2003

Plausible Results

Future Work