Correlations, integration and Hansen-Jagannathan bounds
Recent studies have documented the growing economic and financial integration between countries. Among other things, this has led to the argument that greater integration results in higher bilateral correlations between returns on national stock markets. This study endeavours to link the two issues by utilizing the assumption that if countries are integrated, they would have to display a minimum level of correlation. This is achieved by constructing a bound on the level of the bilateral correlation, as originally developed by Kasa (1995). In contrast to Kasa, the present studies demonstrate that the correlation bound may not be downward sloping in all cases and careful interpretation of the results is required.