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Measuring the degree of fulfillment of the law of one price. Applications to financial markets integration

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URI: https://hdl.handle.net/10016/7213
ISSN: 2340-5031
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we967531.PDF (1.62 MB)
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1996-12
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This paper gives two measures of the degree of fulfillment of the Law of One Price. These measures are characterized by means of saddle point conditions, and are therefore easy to compute in practical situations. Many empirical papers analyze well-Known arbitrage strategies. Our measures present an important advantage over this approach, since we globally focus on the market to find its arbitrage opportunities, without studying special strategies. The developed theory is also applied to markets with frictions, and to study the integration of different financial markets. Our measures are continuous with respect to previous measures in the literature, and seem to be better than them since they compute how much money the agents can win due to the arbitrage opportunities in a financial market, or among different ones.
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Law of one price, Arbitrage, State prices, Relative measure, Financial markets integration
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DE - Working Papers. Economics. WE
Economists Online