Financial Integration and Market (In)Efficiency in International Capital Markets

• Applicant: Professor Dr. Fabian Hollstein
• Subject Area: Accounting and Finance
• Term: from 2019 to 2022
• Project identifier: Deutsche Forschungsgemeinschaft (DFG) - Project number 433352673

With this project, I examine the degree to which international capital markets are efficient and financially integrated into a world capital market. Furthermore, I seek an integrated view on asset pricing factor models across different asset classes. In the project, I test for inefficiencies in two dimensions. In the first subproject, a large set of anomaly variables, documented thus far primarily for the U.S. capital market, is examined. The main goal of this part is to test whether these anomalies are pervasive across international capital markets. Having documented whether these anomalies exist, an important question relates to whether they can be explained by factor models, and, thus, be interpreted as systematic risk, or whether these constitute market inefficiencies. To examine this, I use numerous different unconditional and conditional factor models. In a second subproject, I aim to provide a more direct test on to what degree behavioral biases of investors distort asset prices in international capital markets. For doing so, a behavioral bias score variable, based on measures that capture probability-weighting behavior, will be introduced. After testing whether this behavioral score as well as its components is/are priced in international capital markets, I test which country characteristics or legal environments amplify or dampen the effect of behavioral biases on asset prices in international markets. In a third subproject, I test to what degree international markets are integrated in the regional or world markets. To analyze this question, I test whether regional and global factor models can span their local counterparts. Furthermore, it will be examined whether local, regional, or global factor models perform better in explaining different capital market anomalies. I further study the determinants of financial integration by regressing the local factor alphas on different country characteristics. In a final subproject, I examine asset-pricing factors across different asset classes. The goal is to test to what degree asset-pricing models from one class (e.g., bonds) can price portfolios of other asset classes (e.g., commodities, options, stocks). Finally, I aim to develop an optimal asset-pricing model with factors possibly derived from all asset classes.

• DFG Programme: Research Grants
• Co-Investigators: Professor Dr. Marcel Prokopczuk; Vulnet Sejdiu