Integration and arbitrage in the spanish financial markets: an empirical approach

Several authors have introduced different ways to measure the integration between fmancial markets. Most of them are derived from the basic assumptions to price assets, like the Law of One Price or the absence of arbitrage opportunities. Two perfectly integrated markets must give identical price to identical fmal payoffs, and a vector of positive discount factors, common to both markets, must exist. Therefore, if these properties do not hold, their degree of violation can be measured and considered as an integration measure. The present paper empirically test the integration measures in the Spanish fmancial markets. Hence, several interesting values are obtained, like for instance, the state prices or the risk-neutral probabilities. Furthermore, when the risk-neutral probabilities do not exist, explicit cross-market arbitrage portfolios are detected. The results of our test are surprising for several reasons. First of all, the arbitrage opportunities very often appear, and the bid-ask spread and the transaction costs are not able to avoid the arbitrage profits. Furthermore, the criticisms, which are usually argued when empirical papers show the existence of arbitrage opportunities, do not apply here, since we work with perfectly synchronized high frequency data. On the other hand, different integration measures show a similar evolution along the tested period, although these measures give different information about the markets efficiency and integration, and they do not have to be necessarily related.