Levy Yeyati, EduardoSchmukler, Sergio L.Van Horen, Neeltje2012-06-212012-06-212006-04https://hdl.handle.net/10986/8704The authors argue 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, reflecting accurately the factors that segment markets and inhibit price arbitrage. Applying to equity markets recent methodological developments in the purchasing power parity literature, they show that nonlinear Threshold Autoregressive (TAR) models properly capture the behavior of the cross market premium. The estimates reveal the presence of narrow non-arbitrage bands and indicate that price differences outside these bands are rapidly arbitraged away, much faster than what has been documented for good markets. Moreover, the authors find that financial integration increases with market liquidity. Capital controls, when binding, contribute to segment financial markets by widening the non-arbitrage bands and making price disparities more persistent. Crisis episodes are associated with higher volatility, rather than by more persistent deviations from the law of one price.CC BY 3.0 IGOADJUSTMENT MECHANISMARBITRAGEASSET MARKETASSET MARKETSBENCHMARKCAPITAL CONTROLSCAPITAL FLIGHTCAPITAL INFLOWSCAPITAL MARKETCAPITAL MARKETSCAPITAL MOBILITYCAPITAL OUTFLOWSCDCONSUMER PRICECONSUMER PRICE INDEXESCONVERTIBILITYCRISIS EPISODESDISCOUNT RATEDIVIDENDSDOMESTIC MARKETDOMESTIC MARKETSEMERGING ECONOMIESEMERGING MARKETEXCHANGE RATEEXCHANGE RATE RISKEXCHANGE RATESFINANCIAL CRISESFINANCIAL CRISISFINANCIAL INTEGRATIONFINANCIAL MARKETFINANCIAL MARKETSFOREIGN EXCHANGEFOREIGN EXCHANGE RISKFOREIGN EXCHANGE TRANSACTIONSFORWARD EXCHANGEFUTURE RESEARCHGOLD STANDARDHOME MARKETINTEREST RATEINTEREST RATESINTERNATIONAL FINANCIAL MARKETINTERNATIONAL INVESTORSINTERNATIONAL MARKETINTERNATIONAL MARKETSLATIN AMERICANLIQUIDITYLOCAL CURRENCYMARKET INTEGRATIONMARKET PRICEMARKET SEGMENTATIONMAXIMUM LIKELIHOOD ESTIMATIONPOLICY RESEARCHPOOLINGPRICE COMPARISONSPRICE INDEXESPRICE VOLATILITYPRICING MODELSPURCHASINGPURCHASING POWERPURCHASING POWER PARITYRANDOM WALKREAL EFFECTIVE EXCHANGE RATESREAL EXCHANGEREAL EXCHANGE RATESREAL INTERESTREAL INTEREST RATERESERVESRETURN DIFFERENTIALSRISK DIVERSIFICATIONRISK PREMIUMSALESECURITIESSPREADSTANDARD DEVIATIONSTOCK PRICESSTOCKSSUBSTITUTIONTRANSACTION COSTSVOLATILITYWorld Bank10.1596/1813-9450-3897