We study the method proposed by Flood and Rose (FR, 2004, 2005) for checking for financial integration by estimating the risk-free rate using the idiosyncratic component of individual stock returns. Performing simulations with data with a known return generation process, we find that the FR methodology produces poor estimates of the risk-free rate, and hence the FR method fails to accept integration when true. We then show analytically that the FR method actually provides an estimate of the market return, and conclude the FR methodology would also falsely accept integration as long as the market returns in the two markets do not differ widely.
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机译：我们研究了Flood and Rose（FR，2004，2005）提出的方法，该方法通过使用单个股票收益的特有成分来估算无风险利率来检查财务整合。用已知的收益产生过程对数据进行仿真，我们发现FR方法无法准确估计无风险利率，因此FR方法为true时无法接受积分。然后，我们通过分析表明FR方法实际上提供了市场收益的估计，并得出结论，只要两个市场的市场收益相差不大，FR方法也将错误地接受整合。
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