Asset Pricing Redux: Methodology and Mystery

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Abstract
This paper develops a simple new methodology to test financial market integration. Our technique is tightly based on a general intertemporal asset-pricing model, and relies on estimating and comparing expected discount rates across asset markets. The technique is undemanding in terms of both data and estimation. We provide a variety of domestic and international empirical illustrations of our technique, and find surprisingly little evidence of integration. While the S&P 500 market seems typically to be integrated, others are not, including: the NASDAQ, the Toronto Stock Exchange, and three different classes of American bonds. Further, there is little evidence of integration between these apparently deep frictionless financial markets.