Limits to international arbitrage: an empirical evaluation

Hans Dewachter and Kristien Smedts
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Kristien Smedts: AFI, KULeuven, Belgium, Postal: AFI, KULeuven, Belgium

International Journal of Finance & Economics, 2007, vol. 12, issue 3, 273-285

Abstract: 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.

Date: 2007
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Working Paper: Limits to International Arbitrage: an Empirical Evaluation (2004)
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DOI: 10.1002/ijfe.311

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