International financial integration through the law of one price
By: Sergio L. Schmukler, Eduardo Levy Yeyati, Neeltje Van Horen
Contributors: Levy Yeyati, Eduardo; World Bank
Series: Policy research working paper -- 3897; Policy research working papers (Online) -- 3897.
Publisher: World Bank
Published: 2006
Place of publication: Washington, D.C
Language: eng
Format: [electronic resource] /
Subjects: International finance; International economic integration
Description: "The authors argue that the cross-market premium (the ratio between the domestic and the international market price of cross-listed stocks) provides a valuable measure of international financial integration, reflecting accurately the factors that segment markets and inhibit price arbitrage.  Applying to equity markets recent methodological developments in the purchasing power parity literature, they show that nonlinear Threshold Autoregressive (TAR) models properly capture the behavior of the cross market premium.  The estimates reveal the presence of narrow non-arbitrage bands and indicate that price differences outside these bands are rapidly arbitraged away, much faster than what has been documented for good markets.  Moreover, the authors find that financial integration increases with market liquidity.  Capital controls, when binding, contribute to segment financial markets by widening the non-arbitrage bands and making price disparities more persistent.  Crisis episodes are associated with higher volatility, rather than by more persistent deviations from the law of one price. "--World Bank web site.
Notes: Title from PDF file as viewed on 4/24/2006.

Includes bibliographical references.

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Mode of access: World Wide Web.