Exchange Rate Systems and International Capital Market Integration

Using the technique of examination of asset-yield covariation, an attempt is made to assess the impact of floating rates on capital market integration. The US was used as the focal point country, and factor analysis was applied to covered yields in the call money, bond and equity markets for a variety of industrial countries. Factor analysis is a multivariate statistical technique based on the assumption that the variables in question are related in some significant way and designed to extract a small number of hypothetical factors that account for the variance common to the variables being analyzed. The data used are monthly call money interest rates, long-term bond yields and industrial share prices. Spot and 3-month forward exchange rates were used to derive covered rates. The analysis is performed on 3 periods, from the 1960s through 1977.The results of the analysis suggest that there are no stable sublinkages among capital markets, and there is no generalizable trend in the degree of market integration over the period covered.