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Essays on international financial integration
With growing liberalization of economies across the globe over the past few decades, there has been an increased sense among financial market participants that international financial markets have become more integrated. Yet there is very little consensus among the existing studies on the presence and level of integration. Most of the existing studies on integration have come under criticism due to the models employed to measure integration. In this dissertation, we extend the works of Chen and Knez (1995, 1996) and Farnsworth, Ferson, Todd and Yomotov (2002) to measure international financial integration through stochastic discount factors (SDF). SDF based methodology does not suffer from the model assumptions made in most of the earlier studies. In the first part of the dissertation, we study the properties of the SDF based integration measure through simulated markets. The aim of the simulation analysis is study how this measure behaves under different market returns' structures and to establish benchmarks for estimates obtained from the actual market data. Our analysis shows that the SDF based integration measure has the desired characteristics implied by the theory of integration and is non-zero even for perfectly integrated markets. In the second part of this dissertation, we apply this measure to study equity market integration among ten developed countries from January 1990 to December 2002. The analysis shows that the equity markets of these countries are highly integrated. The level of integration changes over time but the markets appear to be converging to a higher level of integration starting from the later half of the sample period. In the last part of this dissertation, we use an SDF based measure to study international integration through international mutual funds' performance. Our analysis shows that the international mutual funds do not make any abnormal returns when measured against a naïve buy and hold strategy of an investor invested primarily in either the US equity market or the local equity markets of the respective region.
Latif, Saira, "Essays on international financial integration" (2005). Doctoral Dissertations Available from Proquest. AAI3163682.