Comovements among national stock markets

This paper uses the methodology of Hansen and Jaganathan (1991) to derive a lower bound on the correlation between any pair of asset returns under the hypothesis of complete markets. The bound is a simple function of the two assets' Sharpe ratios and the coefficient of variation of a unique stochastic discount factor. The paper uses this bound to conduct robust, nonparametric tests of the hypothesis that international equity markets are integrated. ; Using monthly stock return data from the U.S., Japan, and Great Britain for the period 1980 through 1993, I find that conclusions about market integration depend sensitively on the assumed variation of the (unobserved) common world discount rate. Given the observed correlations in returns, markets are more likely to be integrated the more volatile is the discount rate.