China and international market integration: Evidence from the law of one price in the Middle East and Africa |
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| Affiliation: | 1. Nanjing University of Finance and Economics, China;2. Hong Kong Baptist University, Hong Kong;3. University of Wisconsin – Madison, USA;4. McMaster University, Canada;1. Department of Finance, School of Economics and Finance, Universidad EAFIT, Carrera 49 No. 7 Sur-50, Medellin, Colombia;2. School of Management, Universidad de los Andes, Calle 21, No. 1-20, Bogota, Colombia;3. Department of Economics and IME, University of Salamanca, Campus Miguel de Unamuno, 37007 Salamanca, Spain;1. School of Economics and Management, Key Laboratory of Financial Science and Technology Innovation, Fuzhou University, 2 Xue Yuan Road, University Town, Fuzhou, Fujian, PR China;2. School of Economics and Management, Fuzhou University, 2 Xue Yuan Road, University Town, Fuzhou, Fujian, PR China;1. Research Department, Hong Kong Monetary Authority, 55/F, Two International Finance Centre, 8 Finance Street, Central, Hong Kong, China;2. Institute of Theoretical Physics and Department of Physics, The Chinese University of Hong Kong, Shatin, New Territories, Hong Kong, China;1. Gabelli School of Business, Fordham University, 45 Columbus Avenue, New York, NY 10019, United States;2. FICC, Taipei Fubon Commercial Bank, 18F 169 Section 4 Ren Ai Road, Taipei, Taiwan;1. School of Finance, Southwestern University of Finance and Economics, Chengdu, Sichuan, PR China;2. School of Economics and Management, Southwest Jiaotong University, Chengdu, Sichuan, PR China |
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| Abstract: | We model market integration in the Middle East and Africa by analyzing price dispersion and testing the law of one price (LOP) on highly-comparable actual local retail prices of 135 goods and services across 23 countries in the region over the period of 1990–2016. Second-generation panel estimators are applied to four price benchmarks: Regional average, South Africa, China, and US prices. Cross-regional price dispersion diminishes considerably over time up to 2008, particularly for non-tradeables around China price. The test of LOP indicates the percentage of convergent prices is highest in China price benchmark, followed by US, South Africa, and regional average benchmarks. Direct estimation of the convergence speed confirms this order. Overall, the results show evidence of increasing market integration in Middle East and Africa but it appears to be driven by global forces and, especially, the rise of China as a new economic power. The results show that some emerging market economies, such as China, can step up and promote integration while traditional economic powerhouses, such as the USA and UK, disengage from international economic relations. |
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| Keywords: | Middle East and Africa Economic integration Law of one price Convergence Price dispersion China |
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