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Article
Publication date: 26 June 2009

Marie‐Claude Beaulieu, Marie‐Hélène Gagnon and Lynda Khalaf

The purpose of this paper is to examine financial integration across North American stock markets from January 1984 to December 2003.

1362

Abstract

Purpose

The purpose of this paper is to examine financial integration across North American stock markets from January 1984 to December 2003.

Design/methodology/approach

The paper uses an arbitrage pricing theory framework. The risk factors considered are the three Fama and French factors augmented with momentum for both countries as well as their international counterparts. Both the domestic and international four factor models in cross section and test for partial, mild, and strong financial integration are estimated. The domestic and international model are estimated on domestic portfolios and on a subset of Canadian cross listings matched with American stocks.

Findings

Results can be summarized as follows: first, results show stronger evidence of mild rather than partial or strong integration in both domestic portfolios and interlisted stocks. Second, interlisted stocks appear at first glance to be more integrated than the domestic portfolios, but this result can be attributed to the poor explanatory power of the models applied to interlisted stocks. Once the authors rule out the case where the model does not generate statistically important risk premiums for both countries, the evidence of integration is similar in both domestic and interlisted stocks. Third, the domestic and international models have similar explanatory power, although the domestic model performs better with the Canadian interlisted stocks are found.

Originality/value

The results suggest that, in an international context, a portfolio manager is better off using the four factor model as a benchmark in cross sections rather than the single market. Furthermore, if the agency problem described in Karolyi is ignored, Canadian interlisted stocks and Canadian domestic portfolios have the same diversification potential.

Details

International Journal of Managerial Finance, vol. 5 no. 3
Type: Research Article
ISSN: 1743-9132

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Article
Publication date: 5 April 2011

Usha R. Mittoo

1473

Abstract

Details

International Journal of Managerial Finance, vol. 7 no. 2
Type: Research Article
ISSN: 1743-9132

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