International Financial Integration through the Law of One Price

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...

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Main Authors:	Levy Yeyati, Eduardo, Schmukler, Sergio L., Van Horen, Neeltje
Format:	Policy Research Working Paper
Language:	English
Published:	World Bank, Washington, DC 2012
Subjects:	ADJUSTMENT MECHANISM ARBITRAGE ASSET MARKET ASSET MARKETS BENCHMARK CAPITAL CONTROLS CAPITAL FLIGHT CAPITAL INFLOWS CAPITAL MARKET CAPITAL MARKETS CAPITAL MOBILITY CAPITAL OUTFLOWS CD CONSUMER PRICE CONSUMER PRICE INDEXES CONVERTIBILITY CRISIS EPISODES DISCOUNT RATE DIVIDENDS DOMESTIC MARKET DOMESTIC MARKETS EMERGING ECONOMIES EMERGING MARKET EXCHANGE RATE EXCHANGE RATE RISK EXCHANGE RATES FINANCIAL CRISES FINANCIAL CRISIS FINANCIAL INTEGRATION FINANCIAL MARKET FINANCIAL MARKETS FOREIGN EXCHANGE FOREIGN EXCHANGE RISK FOREIGN EXCHANGE TRANSACTIONS FORWARD EXCHANGE FUTURE RESEARCH GOLD STANDARD HOME MARKET INTEREST RATE INTEREST RATES INTERNATIONAL FINANCIAL MARKET INTERNATIONAL INVESTORS INTERNATIONAL MARKET INTERNATIONAL MARKETS LATIN AMERICAN LIQUIDITY LOCAL CURRENCY MARKET INTEGRATION MARKET PRICE MARKET SEGMENTATION MAXIMUM LIKELIHOOD ESTIMATION POLICY RESEARCH POOLING PRICE COMPARISONS PRICE INDEXES PRICE VOLATILITY PRICING MODELS PURCHASING PURCHASING POWER PURCHASING POWER PARITY RANDOM WALK REAL EFFECTIVE EXCHANGE RATES REAL EXCHANGE REAL EXCHANGE RATES REAL INTEREST REAL INTEREST RATE RESERVES RETURN DIFFERENTIALS RISK DIVERSIFICATION RISK PREMIUM SALE SECURITIES SPREAD STANDARD DEVIATION STOCK PRICES STOCKS SUBSTITUTION TRANSACTION COSTS VOLATILITY
Online Access:	http://documents.worldbank.org/curated/en/2006/04/6737251/international-financial-integration-through-law-one-price http://hdl.handle.net/10986/8704

id	okr-10986-8704
recordtype	oai_dc
spelling	okr-10986-87042021-04-23T14:02:40Z International Financial Integration through the Law of One Price Levy Yeyati, Eduardo Schmukler, Sergio L. Van Horen, Neeltje ADJUSTMENT MECHANISM ARBITRAGE ASSET MARKET ASSET MARKETS BENCHMARK CAPITAL CONTROLS CAPITAL FLIGHT CAPITAL INFLOWS CAPITAL MARKET CAPITAL MARKETS CAPITAL MOBILITY CAPITAL OUTFLOWS CD CONSUMER PRICE CONSUMER PRICE INDEXES CONVERTIBILITY CRISIS EPISODES DISCOUNT RATE DIVIDENDS DOMESTIC MARKET DOMESTIC MARKETS EMERGING ECONOMIES EMERGING MARKET EXCHANGE RATE EXCHANGE RATE RISK EXCHANGE RATES FINANCIAL CRISES FINANCIAL CRISIS FINANCIAL INTEGRATION FINANCIAL MARKET FINANCIAL MARKETS FOREIGN EXCHANGE FOREIGN EXCHANGE RISK FOREIGN EXCHANGE TRANSACTIONS FORWARD EXCHANGE FUTURE RESEARCH GOLD STANDARD HOME MARKET INTEREST RATE INTEREST RATES INTERNATIONAL FINANCIAL MARKET INTERNATIONAL INVESTORS INTERNATIONAL MARKET INTERNATIONAL MARKETS LATIN AMERICAN LIQUIDITY LOCAL CURRENCY MARKET INTEGRATION MARKET PRICE MARKET SEGMENTATION MAXIMUM LIKELIHOOD ESTIMATION POLICY RESEARCH POOLING PRICE COMPARISONS PRICE INDEXES PRICE VOLATILITY PRICING MODELS PURCHASING PURCHASING POWER PURCHASING POWER PARITY RANDOM WALK REAL EFFECTIVE EXCHANGE RATES REAL EXCHANGE REAL EXCHANGE RATES REAL INTEREST REAL INTEREST RATE RESERVES RETURN DIFFERENTIALS RISK DIVERSIFICATION RISK PREMIUM SALE SECURITIES SPREAD STANDARD DEVIATION STOCK PRICES STOCKS SUBSTITUTION TRANSACTION COSTS VOLATILITY 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. 2012-06-21T20:09:26Z 2012-06-21T20:09:26Z 2006-04 http://documents.worldbank.org/curated/en/2006/04/6737251/international-financial-integration-through-law-one-price http://hdl.handle.net/10986/8704 English Policy Research Working Paper; No. 3897 CC BY 3.0 IGO http://creativecommons.org/licenses/by/3.0/igo/ World Bank World Bank, Washington, DC Publications & Research :: Policy Research Working Paper Publications & Research
repository_type	Digital Repository
institution_category	Foreign Institution
institution	Digital Repositories
building	World Bank Open Knowledge Repository
collection	World Bank
language	English
topic	ADJUSTMENT MECHANISM ARBITRAGE ASSET MARKET ASSET MARKETS BENCHMARK CAPITAL CONTROLS CAPITAL FLIGHT CAPITAL INFLOWS CAPITAL MARKET CAPITAL MARKETS CAPITAL MOBILITY CAPITAL OUTFLOWS CD CONSUMER PRICE CONSUMER PRICE INDEXES CONVERTIBILITY CRISIS EPISODES DISCOUNT RATE DIVIDENDS DOMESTIC MARKET DOMESTIC MARKETS EMERGING ECONOMIES EMERGING MARKET EXCHANGE RATE EXCHANGE RATE RISK EXCHANGE RATES FINANCIAL CRISES FINANCIAL CRISIS FINANCIAL INTEGRATION FINANCIAL MARKET FINANCIAL MARKETS FOREIGN EXCHANGE FOREIGN EXCHANGE RISK FOREIGN EXCHANGE TRANSACTIONS FORWARD EXCHANGE FUTURE RESEARCH GOLD STANDARD HOME MARKET INTEREST RATE INTEREST RATES INTERNATIONAL FINANCIAL MARKET INTERNATIONAL INVESTORS INTERNATIONAL MARKET INTERNATIONAL MARKETS LATIN AMERICAN LIQUIDITY LOCAL CURRENCY MARKET INTEGRATION MARKET PRICE MARKET SEGMENTATION MAXIMUM LIKELIHOOD ESTIMATION POLICY RESEARCH POOLING PRICE COMPARISONS PRICE INDEXES PRICE VOLATILITY PRICING MODELS PURCHASING PURCHASING POWER PURCHASING POWER PARITY RANDOM WALK REAL EFFECTIVE EXCHANGE RATES REAL EXCHANGE REAL EXCHANGE RATES REAL INTEREST REAL INTEREST RATE RESERVES RETURN DIFFERENTIALS RISK DIVERSIFICATION RISK PREMIUM SALE SECURITIES SPREAD STANDARD DEVIATION STOCK PRICES STOCKS SUBSTITUTION TRANSACTION COSTS VOLATILITY
spellingShingle	ADJUSTMENT MECHANISM ARBITRAGE ASSET MARKET ASSET MARKETS BENCHMARK CAPITAL CONTROLS CAPITAL FLIGHT CAPITAL INFLOWS CAPITAL MARKET CAPITAL MARKETS CAPITAL MOBILITY CAPITAL OUTFLOWS CD CONSUMER PRICE CONSUMER PRICE INDEXES CONVERTIBILITY CRISIS EPISODES DISCOUNT RATE DIVIDENDS DOMESTIC MARKET DOMESTIC MARKETS EMERGING ECONOMIES EMERGING MARKET EXCHANGE RATE EXCHANGE RATE RISK EXCHANGE RATES FINANCIAL CRISES FINANCIAL CRISIS FINANCIAL INTEGRATION FINANCIAL MARKET FINANCIAL MARKETS FOREIGN EXCHANGE FOREIGN EXCHANGE RISK FOREIGN EXCHANGE TRANSACTIONS FORWARD EXCHANGE FUTURE RESEARCH GOLD STANDARD HOME MARKET INTEREST RATE INTEREST RATES INTERNATIONAL FINANCIAL MARKET INTERNATIONAL INVESTORS INTERNATIONAL MARKET INTERNATIONAL MARKETS LATIN AMERICAN LIQUIDITY LOCAL CURRENCY MARKET INTEGRATION MARKET PRICE MARKET SEGMENTATION MAXIMUM LIKELIHOOD ESTIMATION POLICY RESEARCH POOLING PRICE COMPARISONS PRICE INDEXES PRICE VOLATILITY PRICING MODELS PURCHASING PURCHASING POWER PURCHASING POWER PARITY RANDOM WALK REAL EFFECTIVE EXCHANGE RATES REAL EXCHANGE REAL EXCHANGE RATES REAL INTEREST REAL INTEREST RATE RESERVES RETURN DIFFERENTIALS RISK DIVERSIFICATION RISK PREMIUM SALE SECURITIES SPREAD STANDARD DEVIATION STOCK PRICES STOCKS SUBSTITUTION TRANSACTION COSTS VOLATILITY Levy Yeyati, Eduardo Schmukler, Sergio L. Van Horen, Neeltje International Financial Integration through the Law of One Price
relation	Policy Research Working Paper; No. 3897
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.
format	Publications & Research :: Policy Research Working Paper
author	Levy Yeyati, Eduardo Schmukler, Sergio L. Van Horen, Neeltje
author_facet	Levy Yeyati, Eduardo Schmukler, Sergio L. Van Horen, Neeltje
author_sort	Levy Yeyati, Eduardo
title	International Financial Integration through the Law of One Price
title_short	International Financial Integration through the Law of One Price
title_full	International Financial Integration through the Law of One Price
title_fullStr	International Financial Integration through the Law of One Price
title_full_unstemmed	International Financial Integration through the Law of One Price
title_sort	international financial integration through the law of one price
publisher	World Bank, Washington, DC
publishDate	2012
url	http://documents.worldbank.org/curated/en/2006/04/6737251/international-financial-integration-through-law-one-price http://hdl.handle.net/10986/8704
_version_	1764406157674283008

International Financial Integration through the Law of One Price

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