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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

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 across instruments/borders/markets, etc.


Key: across instruments/borders/markets, etc.


Empirical strategy
Empirical Strategy across instruments/borders/markets, etc.


Impose two reasonable assumptions for estimation
Impose Two (Reasonable?) Assumptions for Estimation: across instruments/borders/markets, etc.


Now we have an estimable panel equation
Now We Have an Estimable Panel Equation: across instruments/borders/markets, etc.


Why this strategy
Why this Strategy? across instruments/borders/markets, etc.


Are assumptions reasonable
Are Assumptions Reasonable? across instruments/borders/markets, etc.


Strengths of methodology
Strengths of Methodology across instruments/borders/markets, etc.


Differences with literature
Differences with Literature across instruments/borders/markets, etc.


Most importantly don t impose bond market integration
Most Importantly, across instruments/borders/markets, etc.don’t impose bond market integration


Illustration 1 american equity data
Illustration #1: American Equity Data across instruments/borders/markets, etc.


Notes
Notes across instruments/borders/markets, etc.


Data characteristics
Data Characteristics across instruments/borders/markets, etc.


Shadow discount rates
Shadow Discount Rates across instruments/borders/markets, etc.


Likelihood ratio joint test for asset integration
Likelihood-Ratio (Joint) Test for Asset Integration across instruments/borders/markets, etc.


Broadening the sample
Broadening the Sample across instruments/borders/markets, etc.


Add different asset classes
Add Different Asset Classes across instruments/borders/markets, etc.


Nasdaq is usually not always integrated
NASDAQ is usually (not always) integrated across instruments/borders/markets, etc.


More interesting nasdaq is never integrated with the s p
More Interesting: NASDAQ is across instruments/borders/markets, etc.never integrated with the S&P


Sensitivity analysis
Sensitivity Analysis across instruments/borders/markets, etc.


In fact time varying factors make little difference
In fact, Time-Varying Factors Make Little Difference! across instruments/borders/markets, etc.


Illustration 2 tokyo stock exchange
Illustration #2: Tokyo Stock Exchange across instruments/borders/markets, etc.


Explore importance of grouping
Explore Importance of Grouping across instruments/borders/markets, etc.


Shadow discount rates1
Shadow Discount Rates across instruments/borders/markets, etc.


Likelihood ratio joint test for asset integration1
Likelihood-Ratio (Joint) Test for Asset Integration across instruments/borders/markets, etc.


Tse is not always integrated
TSE is not always integrated! across instruments/borders/markets, etc.


Sensitivity analysis1
Sensitivity Analysis across instruments/borders/markets, etc.


Illustration 3 nyse during the ltcm crisis
Illustration #3: NYSE during the LTCM Crisis across instruments/borders/markets, etc.


Portfolios
Portfolios across instruments/borders/markets, etc.


Shadow discount rates2
Shadow Discount Rates across instruments/borders/markets, etc.


Likelihood ratio joint test for asset integration2
Likelihood-Ratio (Joint) Test for Asset Integration across instruments/borders/markets, etc.


Nyse is not integrated after ltcm russia crisis
NYSE is not integrated after LTCM/Russia Crisis across instruments/borders/markets, etc.


Illustration 4 the asian crisis of 1997
Illustration #4: The Asian Crisis of 1997 across instruments/borders/markets, etc.


Portfolios1
Portfolios across instruments/borders/markets, etc.


Again
Again: across instruments/borders/markets, etc.


Likelihood ratio joint test for asset integration3
Likelihood-Ratio (Joint) Test for Asset Integration across instruments/borders/markets, etc.


Tokyo and seoul are never integrated
Tokyo and Seoul are never integrated! across instruments/borders/markets, etc.


Illustration 5 american securities 1993 2002
Illustration #5: American Securities 1993-2002 across instruments/borders/markets, etc.


American stocks and bonds are not integrated
American Stocks and Bonds are not Integrated! across instruments/borders/markets, etc.





Future work
Future Work returns!


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