Canadian and U.S. financial markets: testing the international integration hypothesis under time‐varying conditional volatility

Abstract.  This paper evaluates the international integration hypothesis, that is, that risk‐adjusted anticipated returns are identical, even when financial instruments are traded in different countries. Under time‐varying conditional volatility, this hypothesis is tested by verifying the equality between domestic and foreign risk prices associated with a multi‐factor analytic specification. The maximum‐likelihood and Kalman‐filter estimates are used to assess the national risk prices and interpret the factors. Empirically, the integration of Canadian and U.S. financial markets depends on the risk prices of two factors, which are related to certain non‐monetary events and to the conduct of monetary policies. JEL classification: G15, C32