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Measurement of Market Integration and Arbitrage

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Author Info
Chen, Zhiwu
Knez, Peter J
Abstract

We develop a measurement theory of market integration, based on two notions of "integrated markets. " First, two markets cannot be perfectly integrated in any sense if one can construct two portfolios, one from each market, that have identical payoffs but different prices. In that case, the law of one price is violated across the markets. Second, they cannot be integrated in a stronger sense if there are cross-market arbitrage opportunities. Two measures of market integration are developed, respectively reflecting these notions. The smaller the measures, the more closely integrated (in the respective senses) the markets. Among other things, they are interpreted as measuring pricing discrepancy between markets. Article published by Oxford University Press on behalf of the Society for Financial Studies in its journal, The Review of Financial Studies.

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Article provided by Oxford University Press for Society for Financial Studies in its journal Review of Financial Studies.

Volume (Year): 8 (1995)
Issue (Month): 2 ()
Pages: 287-325
Download reference. The following formats are available: HTML (with abstract), plain text (with abstract), BibTeX, RIS (EndNote, RefMan, ProCite), ReDIF
Handle: RePEc:oup:rfinst:v:8:y:1995:i:2:p:287-325

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  10. Brian M Lucey & Suk-Joong Kim & Eliza Wu, 2005. "Dynamics of Bond Market Integration between Existing And Accession EU Countries," The Institute for International Integration Studies Discussion Paper Series iiisdp025, IIIS. [Downloadable!]
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  21. Jochem, Axel & Herrmann, Sabine, 2003. "The international integration of money markets in the central and east European accession countries : deviations from covered interest parity, capital controls and inefficiencies in the financial sect," Discussion Paper Series 1: Economic Studies 2003,07, Deutsche Bundesbank, Research Centre. [Downloadable!]
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