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Title:International financial integration through the law of one price: The role of liquidity and capital controls PDF Logo
Authors:Yeyati, Eduardo Levy
Schmukler, Sergio
Horen, Neeltje van
Issue Date:2008
Series/Report no.:ADB Institute Discussion Papers 92
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.
Document Type:Working Paper
Appears in Collections:ADBI Discussion Papers, Asian Development Bank Institute (ADBI)

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