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

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Financial Asset Integration

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Financial asset integration

Financial Asset Integration

Andrew K. Rose and Robert P. Flood

All materials (data sets, programs, papers, slides) at:

http://faculty.haas.berkeley.edu/arose


Two objectives

Derive new methodology to assess integration of assets across instruments/borders/markets, etc.

Illustrate technique empirically

Two Objectives:


Definition of asset integration

Definition of Asset Integration


Financial asset integration

Key:


Empirical strategy

Empirical Strategy


Impose two reasonable assumptions for estimation

Impose Two (Reasonable?) Assumptions for Estimation:


Now we have an estimable panel equation

Now We Have an Estimable Panel Equation:


Why this strategy

Why this Strategy?


Are assumptions reasonable

Are Assumptions Reasonable?


Strengths of methodology

Strengths of Methodology


Differences with literature

Differences with Literature


Most importantly don t impose bond market integration

Most Importantly, don’t impose bond market integration


Illustration 1 american equity data

Illustration #1: American Equity Data


Notes

Notes


Data characteristics

Data Characteristics


Shadow discount rates

Shadow Discount Rates


Likelihood ratio joint test for asset integration

Likelihood-Ratio (Joint) Test for Asset Integration


Broadening the sample

Broadening the Sample


Add different asset classes

Add Different Asset Classes


Nasdaq is usually not always integrated

NASDAQ is usually (not always) integrated


More interesting nasdaq is never integrated with the s p

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


Sensitivity analysis

Sensitivity Analysis


In fact time varying factors make little difference

In fact, Time-Varying Factors Make Little Difference!


Illustration 2 tokyo stock exchange

Illustration #2: Tokyo Stock Exchange


Explore importance of grouping

Explore Importance of Grouping


Shadow discount rates1

Shadow Discount Rates


Likelihood ratio joint test for asset integration1

Likelihood-Ratio (Joint) Test for Asset Integration


Tse is not always integrated

TSE is not always integrated!


Sensitivity analysis1

Sensitivity Analysis


Illustration 3 nyse during the ltcm crisis

Illustration #3: NYSE during the LTCM Crisis


Portfolios

Portfolios


Shadow discount rates2

Shadow Discount Rates


Likelihood ratio joint test for asset integration2

Likelihood-Ratio (Joint) Test for Asset Integration


Nyse is not integrated after ltcm russia crisis

NYSE is not integrated after LTCM/Russia Crisis


Illustration 4 the asian crisis of 1997

Illustration #4: The Asian Crisis of 1997


Portfolios1

Portfolios


Again

Again:


Likelihood ratio joint test for asset integration3

Likelihood-Ratio (Joint) Test for Asset Integration


Tokyo and seoul are never integrated

Tokyo and Seoul are never integrated!


Illustration 5 american securities 1993 2002

Illustration #5: American Securities 1993-2002


American stocks and bonds are not integrated

American Stocks and Bonds are not Integrated!


Deltas are uncorrelated with stock market and t bill returns

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


Illustration 6 august 21 2003

Illustration #6: August 21, 2003


Plausible results

Plausible Results


Future work

Future Work


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