Abstract
Market integration literature employing cointegration approach often carelessly uses different categories of data, such as price indices, total return indices or indices adjusted with risk-free rate. This article proves using only data adjusted with risk-free rate can be compatible with Capital Asset Pricing Model (CAPM). Based on this finding, links between cointegration system and international CAPM are established. Assuming a group of benchmark markets in a cointegration system is fully integrated with global market, this article applies Gonzalo and Granger (1995) decomposition method to show the single common trend in the system is a proxy for accumulated world portfolio excess return and its loading vector is a vector of estimated betas in CAPM.
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