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Novel Methodology for Assessing Financial Asset Integration Across Borders and Markets

Develop a new methodology to evaluate asset integration across different instruments, borders, and markets. Demonstrate the technique empirically, identifying key definitions and empirical strategies, making reasonable assumptions for estimation, and highlighting the strengths and differences of the methodology in literature. Illustrate with American equity, Tokyo Stock Exchange, NYSE during the LTCM Crisis, and the Asian Crisis of 1997.

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Novel Methodology for Assessing Financial Asset Integration Across Borders and Markets

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

  3. Definition of Asset Integration

  4. Key:

  5. Empirical Strategy

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

  7. Now We Have an Estimable Panel Equation:

  8. Why this Strategy?

  9. Are Assumptions Reasonable?

  10. Strengths of Methodology

  11. Differences with Literature

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

  13. Illustration #1: American Equity Data

  14. Notes

  15. Data Characteristics

  16. Shadow Discount Rates

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

  18. Broadening the Sample

  19. Add Different Asset Classes

  20. NASDAQ is usually (not always) integrated

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

  22. Sensitivity Analysis

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

  24. Illustration #2: Tokyo Stock Exchange

  25. Explore Importance of Grouping

  26. Shadow Discount Rates

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

  28. TSE is not always integrated!

  29. Sensitivity Analysis

  30. Illustration #3: NYSE during the LTCM Crisis

  31. Portfolios

  32. Shadow Discount Rates

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

  34. NYSE is not integrated after LTCM/Russia Crisis

  35. Illustration #4: The Asian Crisis of 1997

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