MODELLING AND ECONOMETRIC FRONTIERS IN MARKET INTEGRATION AND PRICE TRANSMISSION ANALYSIS

The broadness and inherent non-linearities in the market integration concepts have resulted in diversities in modelling framework. We critically review the current frontier models of market integration and highlight their weaknesses within the framework of competitive equilibrium theory and arbitrage dynamics. While the methods developed based on the former theoretical framework provide deeper equilibrium notions of markets functionality and implied efficiency, the study reveals that unaccounted time dynamics from inter-market relations can result in erroneous market outcomes and loss of crucial policy information. The extents to which techniques currently applied in dynamic frame are limited by non-linear complexities imposed by transactions costs and switching equilibrium conditions are also demonstrated. Sample splitting technique is suggested to address higher level nonlinearities imposed by switching equilibrium conditions and transactions cost