Testing price integration between US and emerging ETF markets from a 'law of one price' perspective
by Gerasimos G. Rompotis
International Journal of Accounting and Finance (IJAF), Vol. 7, No. 4, 2017

Abstract: The 'law of one price' entails that two financial assets, which trade in different markets but have identical expected cash flow payoffs, must have identical prices. From an empirical point of view, this law can be examined by assessing the degree of price integration of two financial markets offering similar products. Price integration between US and emerging ETF markets is assessed in this paper. A sample of 30 ETF pairs tracking the same market index (i.e., 30 US-listed ETFs and 30 ETFs listed in the Hong Kong Stock Exchange and the Singapore Stock Exchange) is employed to perform a wide range of integration tests. Econometric techniques, such as autoregressive moving average models with autoregressive conditional heteroskedasticity innovations, correlation analysis, Granger causality tests and autoregressive distributed lag cointegration tests, are used. A strong degree of integration between the US and the Asian emerging ETF markets is revealed. Based on our results, the law of one price is not rejected. Therefore, there are no significant benefits to ETF investors seeking exposure to emerging markets by simply switching from US-listed ETFs to similar Asia-listed ETF products and vice-versa.

Online publication date: Mon, 22-Jan-2018

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