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Limits to International Arbitrage: an Empirical Evaluation

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  • Hans Dewachter
  • Kristien Smedts

Abstract

This paper studies international financial integration by testing the law of one price across national borders. We extend the methodology as proposed by Chen and Knez (1995) to an international environment and analyze the level of cross-border mispricings. The empirical analysis shows that pricing errors are relatively large. This lack of international financial integration is subsequently analyzed in the market micro-finance literature. We find that micro-factors explain a considerable part of the variance in cross-border pricing errors.

Suggested Citation

  • Hans Dewachter & Kristien Smedts, 2004. "Limits to International Arbitrage: an Empirical Evaluation," Working Papers Department of Economics ces0401, KU Leuven, Faculty of Economics and Business, Department of Economics.
  • Handle: RePEc:ete:ceswps:ces0401
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