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    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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    Citable URI
    http://hdl.handle.net/11540/3680
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    Author
    Yeyati, Eduardo Levy
    Schmukler, Sergio L.
    Horen, Neeltje Van
    Theme
    Finance
    Trade
    Labor Migration
     
    Copyright 2016-2021 Asian Development Bank Institute, except as explicitly marked otherwise
    Copyright 2016-2021 Asian Development Bank Institute, except as explicitly marked otherwise