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Measuring Market Integration: A Model of Arbitrage with an Econometric Application to the Gold Standard, 1879-1913

37 Pages Posted: 9 Feb 1998  

Gauri Prakash-Canjels

Howrey, Simon, Arnold & White - The CapAnalysis Group

Alan M. Taylor

University of California, Davis - Department of Economics; University of Virginia - Department of Economics; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR)

Date Written: June 1997

Abstract

A major question in the literature on the classical gold standard concerns the efficiency of international arbitrage. Most authors have examined efficiency by looking at the spread of the gold points, gold-point violations, the flow of gold in profitable or unprofitable directions, or by tests of various asset market criteria, including speculative efficiency and interest arbitrage. These studies have suffered from many limitations, both methodological and empirical. We offer a new methodology for measuring market integration, based on a theoretical model of arbitrage applicable to any type of market. The model is econometrically tractable using the techniques of threshold autoregressions. We study the efficiency of the dollar-sterling gold standard in this framework, and we radically improve the empirical basis for investigation by compiling a new, high-frequency series of continuous daily data from 1879 to 1913. Using data at this frequency we can derive reasonable econometric estimates of the size of transaction-cost bands (as compared with direct cost estimates). We can also estimate the speed of adjustment through which disequilibria (gold-point violations) were corrected. The changes in these measures over time provides an insight into the evolution of market integration in the classical gold standard.

Suggested Citation

Prakash-Canjels, Gauri and Taylor, Alan M., Measuring Market Integration: A Model of Arbitrage with an Econometric Application to the Gold Standard, 1879-1913 (June 1997). NBER Working Paper No. w6073. Available at SSRN: https://ssrn.com/abstract=42110

Gauri Prakash-Canjels

Howrey, Simon, Arnold & White - The CapAnalysis Group ( email )

1299 Pennsylvania Avenue, NW
Washington, DC 20004
United States
202-383-6815 (Phone)
202-383-7237 (Fax)

Alan M. Taylor (Contact Author)

University of California, Davis - Department of Economics ( email )

One Shields Drive
Davis, CA 95616-8578
United States
530-752-1572 (Phone)
530-752-9382 (Fax)

HOME PAGE: http://www.econ.ucdavis.edu/faculty/amtaylor/

University of Virginia - Department of Economics ( email )

P.O. Box 400182
Charlottesville, VA 22904-4182
United States
(434)-924-3177 (Phone)
(434)-982-2904 (Fax)

HOME PAGE: http://people.virginia.edu/~amt7u

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

HOME PAGE: http://nber.org

Centre for Economic Policy Research (CEPR)

77 Bastwick Street
London, EC1V 3PZ
United Kingdom

HOME PAGE: http://cepr.org

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