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Crises, Capital Controls, and Financial Integration

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  • Eduardo Yeyati
  • Sergio Schmukler
  • Neeltje Van Horen

Abstract

This paper analyzes the effects of capital controls and crises on financial integration, using stocks from emerging economies that trade in both domestic and international markets. The cross market premium provides a valuable measure of how capital controls and crises affect international financial integration. The paper shows that capital controls affect cross market premium in a sustainable way. Controls on capital inflows put downward pressure on domestic markets relative to international ones, generating a negative premium. The opposite happens in case of capital outflows. Crises affect financial integration by generating more volatility in the premium and putting more downward pressure on domestic prices. [ADBI WP no.121]

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Bibliographic Info

Paper provided by eSocialSciences in its series Working Papers with number id:2099.

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Date of creation: Jun 2009
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Handle: RePEc:ess:wpaper:id:2099

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Related research

Keywords: crises; capital controls; financial integration; cross market premium; cross country capital movement; capital controls on inflows; capital controls on outflows; stock market crises; capital market integration;

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References

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  1. Kenneth Rogoff, 1999. "International Institutions for Reducing Global Financial Instability," NBER Working Papers 7265, National Bureau of Economic Research, Inc.
  2. Kevin Cowan & José De Gregorio, 2007. "International Borrowing, Capital Controls, and the Exchange Rate: Lessons from Chile," NBER Chapters, in: Capital Controls and Capital Flows in Emerging Economies: Policies, Practices and Consequences, pages 241-296 National Bureau of Economic Research, Inc.
  3. Michael Mussa & Giovanni Dell'Ariccia & Barry J. Eichengreen & Enrica Detragiache, 1998. "Capital Account Liberalization," IMF Occasional Papers 172, International Monetary Fund.
  4. Rabinovitch, Ramon & Silva, Ana Cristina & Susmel, Raul, 2003. "Returns on ADRs and arbitrage in emerging markets," Emerging Markets Review, Elsevier, vol. 4(3), pages 225-247, September.
  5. Levy Yeyati, Eduardo & Schmukler, Sergio L. & Van Horen, Neeltje, 2003. "The price of inconvertible deposits - the stock market boom during the Argentine crisis," Policy Research Working Paper Series 3146, The World Bank.
  6. Stiglitz, Joseph E., 2000. "Capital Market Liberalization, Economic Growth, and Instability," World Development, Elsevier, vol. 28(6), pages 1075-1086, June.
  7. Fernando Broner & Guido Lorenzoni & Sergio L. Schmukler, 2003. "Why do emerging economies borrow short term?," Economics Working Papers 838, Department of Economics and Business, Universitat Pompeu Fabra, revised Dec 2011.
  8. Acemoglu, Daron & Zilibotti, Fabrizio, 1996. "Was Prometheus Unbound by Chance? Risk, Diversification and Growth," CEPR Discussion Papers 1426, C.E.P.R. Discussion Papers.
  9. Reinhart, Carmen & Edison, Hali, 2001. "Capital controls during financial crises: The case of Malaysia and Thailand," MPRA Paper 13903, University Library of Munich, Germany.
  10. Sebastian Auguste & Kathryn M.E. Dominguez & Herman Kamil & Linda L. Tesar, 2002. "Cross-Border Trading as a Mechanism for Capital Flight: ADRs and the Argentine Crisis," NBER Working Papers 9343, National Bureau of Economic Research, Inc.
  11. Eduardo Levy Yeyati & Sergio Luis Schmukler & Neeltje Van Horen, 2006. "International Financial Integration through the Law of One Price," Business School Working Papers 2006-01, Universidad Torcuato Di Tella.
  12. M Ayhan Kose & Eswar Prasad & Kenneth Rogoff & Shang-Jin Wei, 2009. "Financial Globalization: A Reappraisal," IMF Staff Papers, Palgrave Macmillan, vol. 56(1), pages 8-62, April.
  13. Yeyati, Eduardo Levy & Schmukler, Sergio L. & Van Horen, Neeltje, 2007. "Emerging market liquidity and crises," Policy Research Working Paper Series 4445, The World Bank.
  14. M. Ayhan Kose & Eswar Prasad & Kenneth Rogoff & Shang-Jin Wei, 2006. "Financial Globalization," IMF Working Papers 06/189, International Monetary Fund.
  15. Lawrence H. Summers, 2000. "International Financial Crises: Causes, Prevention, and Cures," American Economic Review, American Economic Association, vol. 90(2), pages 1-16, May.
  16. Sebastian Auguste & Kathryn M.E. Dominguez & Herman Kamil & Linda L. Tesar, 2005. "Cross-Border Trading as a Mechanism for Implicit Capital Flight: ADRs and the Argentine Crisis," Working Papers 533, Research Seminar in International Economics, University of Michigan.
  17. De la Torre, Augusto & Levy Yeyati, Eduardo & Schmukler, Sergio L., 2003. "Living and dying with hard pegs : the rise and fall of Argentina's currency board," Policy Research Working Paper Series 2980, The World Bank.
  18. Ross Levine & Sergio Schmukler, 2005. "Internationalization and Stock Market Liquidity," NBER Working Papers 11894, National Bureau of Economic Research, Inc.
  19. Henry, Peter B., 2007. "Capital Account Liberalization: Theory, Evidence, and Speculation," Research Papers 1974, Stanford University, Graduate School of Business.
  20. Ross Levine & Sergio L. Schmukler, 2005. "Internationalization and the Evolution of Corporate Valuation," NBER Working Papers 11023, National Bureau of Economic Research, Inc.
  21. Graciela Kaminsky & Sergio Schmukler, 2003. "Short-Run Pain, Long-Run Gain: The Effects of Financial Liberalization," NBER Working Papers 9787, National Bureau of Economic Research, Inc.
  22. Gozzi, Juan Carlos & Levine, Ross & Schmukler, Sergio L., 2008. "Patterns of international capital raisings," Policy Research Working Paper Series 4687, The World Bank.
  23. Graciela Laura Kaminsky & Sergio L. Schmukler, 2008. "Short-Run Pain, Long-Run Gain: Financial Liberalization and Stock Market Cycles," Review of Finance, European Finance Association, vol. 12(2), pages 253-292.
  24. Michael Melvin, . "A Stock Market Boom During a Financial Crisis? ADRs and capital outflows in Argentina," Working Papers 2133524, Department of Economics, W. P. Carey School of Business, Arizona State University.
  25. Perry, Guillermo & Serven, Luis, 2003. "The anatomy of a multiple crisis : why was Argentina special and what can we learn from it?," Policy Research Working Paper Series 3081, The World Bank.
  26. repec:kap:eurfin:v:10:y:2006:i:1:p:153-187 is not listed on IDEAS
  27. Levine, Ross & Schmukler, Sergio L., 2007. "Migration, spillovers, and trade diversion: The impact of internationalization on domestic stock market activity," Journal of Banking & Finance, Elsevier, vol. 31(6), pages 1595-1612, June.
  28. Richard N. Cooper, 1999. "Should Capital Controls be Banished?," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 30(1), pages 89-142.
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Citations

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Cited by:
  1. Augusto de la Torre & Eduardo Levy Yeyati & Samuel Pienknagura, . "Latin America’s Deceleration and the Exchange Rate Buffer : LAC Semiannual Report, October 2013," World Bank Other Operational Studies 16107, The World Bank.
  2. Eduardo Levy Yeyati & Tomas Williams, 2011. "Emerging economies in the 2000s:Real decoupling and financial recoupling," Business School Working Papers 2011-06_correccion, Universidad Torcuato Di Tella.

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