Financial Asset Integration

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Financial Asset Integration

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

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Two Objectives

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

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Definition of Asset Integration
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Key
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Empirical Strategy
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Impose Two (Reasonable?) Assumptions for
Estimation
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Now We Have an Estimable Panel Equation
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Why this Strategy?
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Are Assumptions Reasonable?
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Strengths of Methodology
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Differences with Literature
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Most Importantly, dont impose bond market
integration
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Illustration 1 American Equity Data
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Notes
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Data Characteristics
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Shadow Discount Rates
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Likelihood-Ratio (Joint) Test for Asset
Integration
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Broadening the Sample
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Add Different Asset Classes
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NASDAQ is usually (not always) integrated
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More Interesting NASDAQ is never integrated with
the SP
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Sensitivity Analysis
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In fact, Time-Varying Factors Make Little
Difference!
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Illustration 2 Tokyo Stock Exchange
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Explore Importance of Grouping
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Shadow Discount Rates
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Likelihood-Ratio (Joint) Test for Asset
Integration
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TSE is not always integrated!
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Sensitivity Analysis
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Illustration 3 NYSE during the LTCM Crisis
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Portfolios
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Shadow Discount Rates
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Likelihood-Ratio (Joint) Test for Asset
Integration
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NYSE is not integrated after LTCM/Russia Crisis
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Illustration 4 The Asian Crisis of 1997
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Portfolios
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Again
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Likelihood-Ratio (Joint) Test for Asset
Integration
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Tokyo and Seoul are never integrated!
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Illustration 5 American Securities 1993-2002
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American Stocks and Bonds are not Integrated!
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Deltas are uncorrelated with Stock Market and
T-bill returns!
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Illustration 6 August 21, 2003
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Plausible Results
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Future Work