International Financial Integration through the Law of One Price: The Role of Liquidity and Capital Controls
Yeyati, Eduardo Levy; Schmukler, Sergio L.; Horen, Neeltje Van | March 2008
Abstract
This paper takes advantage of the fact that some stocks trade both in domestic and international markets to characterize the degree of international financial integration. The paper argues 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 and the effectiveness of capital controls. Using Autoregressive (AR) models to estimate convergence speeds and non-linear Threshold Autoregressive (TAR) models to identify non-arbitrage bands, we document that price deviations across markets are rapidly arbitraged away and bands are narrow, particularly so for companies with liquid stocks. We also show that regulations on cross-border capital flows can effectively segment domestic markets: controls on outflows (inflows) induce positive (negative) premia that vary with the intensity of the controls.
Citation
Yeyati, Eduardo Levy; Schmukler, Sergio L.; Horen, Neeltje Van. 2008. International Financial Integration through the Law of One Price: The Role of Liquidity and Capital Controls. © Asian Development Bank. http://hdl.handle.net/11540/3680. License: CC BY 3.0 IGO.Keywords
Trade Finance
Rural Finance
Regional Development Finance
Public Financial Management
Public Finance
International Finance
Intergovernmental Finance
Financial System
Financial Flows
Financial Assets
Finance And Trade
Trade Finance
Local Finance
International Monetary Relations
Local Finance
Banks
Capital Market
financial statistics
Foreign trade
Municipal government
Metropolitan government
International banks and banking
Capital movements
Central banks and banking
Bills of exchange
Swaps
Banks and banking
Stock exchanges
Market
Exchange
Balance of trade
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