1. Financial Asset Integration Andrew K. Rose and Robert P. Flood All materials (data sets, programs, papers, slides) at: http://faculty.haas.berkeley.edu/arose

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

3. Definition of Asset Integration

5. Key:

6. Empirical Strategy

7. Impose Two (Reasonable?) Assumptions for Estimation:

8. Now We Have an Estimable Panel Equation:

9. Why this Strategy?

10. Are Assumptions Reasonable?

13. Strengths of Methodology

15. Differences with Literature

16. Most Importantly, don’t impose bond market integration

17. Illustration #1: American Equity Data

18. Notes

19. Data Characteristics

20. Shadow Discount Rates

22. Likelihood-Ratio (Joint) Test for Asset Integration

23. Broadening the Sample

24. Add Different Asset Classes

25. NASDAQ is usually (not always) integrated

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

27. Sensitivity Analysis

28. In fact, Time-Varying Factors Make Little Difference!

31. Illustration #2: Tokyo Stock Exchange

32. Explore Importance of Grouping

33. Shadow Discount Rates

36. Likelihood-Ratio (Joint) Test for Asset Integration

40. TSE is not always integrated!

41. Sensitivity Analysis

42. Illustration #3: NYSE during the LTCM Crisis

43. Portfolios

44. Shadow Discount Rates

47. Likelihood-Ratio (Joint) Test for Asset Integration

49. NYSE is not integrated after LTCM/Russia Crisis

50. Illustration #4: The Asian Crisis of 1997

51. Portfolios

53. Again:

54. Likelihood-Ratio (Joint) Test for Asset Integration

56. Tokyo and Seoul are never integrated!

57. Illustration #5: American Securities 1993-2002

60. American Stocks and Bonds are not Integrated!

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

62. Illustration #6: August 21, 2003

64. Plausible Results

65. Future Work