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Limits to international arbitrage: an empirical evaluation

  • Hans Dewachter
  • Kristien Smedts

    (AFI, KULeuven, Belgium)

This paper studies international financial integration by testing the law of one price across national borders. We use the distance between national discount factors as an integration measure and analyze the level of cross-border mispricing. The empirical analysis shows that pricing differentials are relatively large in economic terms. This lack of international financial integration is subsequently analyzed in the market micro-finance literature. We find that market characteristics explain a considerable part of the variance in our cross-section of pricing differentials. Copyright © 2007 John Wiley & Sons, Ltd.

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File URL: http://hdl.handle.net/10.1002/ijfe.311
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Article provided by John Wiley & Sons, Ltd. in its journal International Journal of Finance & Economics.

Volume (Year): 12 (2007)
Issue (Month): 3 ()
Pages: 273-285

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Handle: RePEc:ijf:ijfiec:v:12:y:2007:i:3:p:273-285
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  1. Lars Peter Hansen & Ravi Jagannathan, 1994. "Assessing Specification Errors in Stochastic Discount Factor Models," NBER Technical Working Papers 0153, National Bureau of Economic Research, Inc.
  2. Froot, Kenneth A. & Dabora, Emil M., 1999. "How are stock prices affected by the location of trade?," Journal of Financial Economics, Elsevier, vol. 53(2), pages 189-216, August.
  3. Gikas A. Hardouvelis & Rafael La Porta & Thierry A. Wizman, 1993. "What moves the discount on country equity funds?," Research Paper 9324, Federal Reserve Bank of New York.
  4. David K. Backus, 2001. "Affine Term Structure Models and the Forward Premium Anomaly," Journal of Finance, American Finance Association, vol. 56(1), pages 279-304, 02.
  5. Keim, Donald B & Madhaven, Ananth, 1996. "The Upstairs Market for Large-Block Transactions: Analysis and Measurement of Price Effects," Review of Financial Studies, Society for Financial Studies, vol. 9(1), pages 1-36.
  6. Owen A. Lamont & Richard H. Thaler, 2003. "Can the Market Add and Subtract? Mispricing in Tech Stock Carve-outs," Journal of Political Economy, University of Chicago Press, vol. 111(2), pages 227-268, April.
  7. Ivo Welch, 2000. "Views of Financial Economists on the Equity Premium and on Professional Controversies," Yale School of Management Working Papers ysm122, Yale School of Management.
  8. S. Baranzoni & P. Bianchi & L. Lambertini, 2000. "Market Structure," Working Papers 368, Dipartimento Scienze Economiche, Universita' di Bologna.
  9. Andrei Shleifer ad Robert W. Vishny, 1995. "The Limits of Arbitrage," Harvard Institute of Economic Research Working Papers 1725, Harvard - Institute of Economic Research.
  10. Chen, Zhiwu & Knez, Peter J, 1995. "Measurement of Market Integration and Arbitrage," Review of Financial Studies, Society for Financial Studies, vol. 8(2), pages 287-325.
  11. Madhavan, Ananth, 2000. "Market microstructure: A survey," Journal of Financial Markets, Elsevier, vol. 3(3), pages 205-258, August.
  12. Brandt, Michael W. & Santa-Clara, Pedro, 2002. "Simulated likelihood estimation of diffusions with an application to exchange rate dynamics in incomplete markets," Journal of Financial Economics, Elsevier, vol. 63(2), pages 161-210, February.
  13. Bodurtha, James N, Jr & Kim, Dong-Soon & Lee, Charles M C, 1995. "Closed-End Country Funds and U.S. Market Sentiment," Review of Financial Studies, Society for Financial Studies, vol. 8(3), pages 879-918.
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