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Market Integration Dynamics and Asymptotic Price Convergence in Distribution

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This paper analyzes the market integration process of nominal prices, develops a model to analyze market integration, and presents a test of increasing market integration. A distinction is made between the economic concepts of price convergence in mean and variance. When both types of convergence occur, prices are said to converge in distribution. We present concepts and definitions related to the market integration process, link these to price convergence in distribution, argue that the Law of One Price is not a sufficient condition for market integration, and present a test of price convergence in distribution. We apply our methodology to two different cases, namely the integration of: i) the inland grains market in 19th Century USA, and ii) the Eurozone long-term bonds market after the euro entered circulation.

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File URL: http://eprints.ucm.es/34143/1/1518.pdf
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Paper provided by Universidad Complutense de Madrid, Facultad de Ciencias Económicas y Empresariales, Instituto Complutense de Análisis Económico in its series Documentos de Trabajo del ICAE with number 2015-18.

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Length: 39 pages
Date of creation: Nov 2015
Handle: RePEc:ucm:doicae:1518
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  1. Andreas Schäfer & Thomas Steger, 2014. "Journey into the Unknown? Economic Consequences of Factor Market Integration under Increasing Returns to Scale," Review of International Economics, Wiley Blackwell, vol. 22(4), pages 783-807, 09.
  2. Stigler, George J & Sherwin, Robert A, 1985. "The Extent of the Market," Journal of Law and Economics, University of Chicago Press, vol. 28(3), pages 555-585, October.
  3. Brunt, Liam & Cannon, Edmund, 2013. "Integration in the English wheat market 1770-1820," Discussion Paper Series in Economics 12/2013, Department of Economics, Norwegian School of Economics.
  4. Bernard, Andrew B. & Durlauf, Steven N., 1996. "Interpreting tests of the convergence hypothesis," Journal of Econometrics, Elsevier, vol. 71(1-2), pages 161-173.
  5. Lanne, Markku & Lutkepohl, Helmut, 2002. "Unit root tests for time series with level shifts: a comparison of different proposals," Economics Letters, Elsevier, vol. 75(1), pages 109-114, March.
  6. Alfredo García-Hiernaux & David E. Guerrero, 2011. "Convergence and Cointegration," Documentos de Trabajo del ICAE 2011-22, Universidad Complutense de Madrid, Facultad de Ciencias Económicas y Empresariales, Instituto Complutense de Análisis Económico.
  7. Saikkonen, Pentti & L tkepohl, Helmut, 2002. "Testing For A Unit Root In A Time Series With A Level Shift At Unknown Time," Econometric Theory, Cambridge University Press, vol. 18(02), pages 313-348, April.
  8. Angus Deaton, 1999. "Commodity Prices and Growth in Africa," Journal of Economic Perspectives, American Economic Association, vol. 13(3), pages 23-40, Summer.
  9. Bernard, Andrew B & Durlauf, Steven N, 1995. "Convergence in International Output," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 10(2), pages 97-108, April-Jun.
  10. Quah, Danny, 1997. "Empirics for Growth and Distribution: Stratification, Polarization, and Convergence Clubs," CEPR Discussion Papers 1586, C.E.P.R. Discussion Papers.
  11. Dobado-González, Rafael & García-Hiernaux, Alfredo & Guerrero, David E., 2012. "The Integration of Grain Markets in the Eighteenth Century: Early Rise of Globalization in the West," The Journal of Economic History, Cambridge University Press, vol. 72(03), pages 671-707, September.
  12. Rafael Dobado-González & Alfredo García-Hiernaux & David E. Guerrero, 2015. "West versus Far East: early globalization and the great divergence," Cliometrica, Journal of Historical Economics and Econometric History, Association Française de Cliométrie (AFC), vol. 9(2), pages 235-264, May.
  13. Ke, Shanzi, 2015. "Domestic Market Integration and Regional Economic Growth—China’s Recent Experience from 1995–2011," World Development, Elsevier, vol. 66(C), pages 588-597.
  14. Lanne, Markku & Lütkepohl, Helmut & Saikkonen, Pentti, 1999. "Comparison of unit root tests for time series with level shifts," SFB 373 Discussion Papers 1999,88, Humboldt University of Berlin, Interdisciplinary Research Project 373: Quantification and Simulation of Economic Processes.
  15. Gregory Clark, 2015. "Markets before economic growth: the grain market of medieval England," Cliometrica, Journal of Historical Economics and Econometric History, Association Française de Cliométrie (AFC), vol. 9(3), pages 265-287, september.
  16. Carol H. Shiue & Wolfgang Keller, 2007. "Markets in China and Europe on the Eve of the Industrial Revolution," American Economic Review, American Economic Association, vol. 97(4), pages 1189-1216, September.
  17. José Casals & Miguel Jerez & Sonia Sotoca, 2009. "Modelling and forecasting time series sampled at different frequencies," Journal of Forecasting, John Wiley & Sons, Ltd., vol. 28(4), pages 316-342.
  18. Bart Hobijn & Philip Hans Franses, 2000. "Asymptotically perfect and relative convergence of productivity," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 15(1), pages 59-81.
  19. Breusch, T S & Pagan, A R, 1979. "A Simple Test for Heteroscedasticity and Random Coefficient Variation," Econometrica, Econometric Society, vol. 47(5), pages 1287-1294, September.
  20. Fama, Eugene F, 1970. "Efficient Capital Markets: A Review of Theory and Empirical Work," Journal of Finance, American Finance Association, vol. 25(2), pages 383-417, May.
  21. Rafael, Dobado-González & Alfredo, García-Hiernaux & David, Guerrero-Burbano, 2013. "West versus East: Early Globalization and the Great Divergence," MPRA Paper 48773, University Library of Munich, Germany.
  22. Quah, Danny T, 1997. "Empirics for Growth and Distribution: Stratification, Polarization, and Convergence Clubs," Journal of Economic Growth, Springer, vol. 2(1), pages 27-59, March.
  23. Brunt, Liam & Cannon, Edmund, 2014. "Measuring integration in the English wheat market, 1770–1820: New methods, new answers," Explorations in Economic History, Elsevier, vol. 52(C), pages 111-130.
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