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Regional Financial Integration in the Caribbean

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  • Goohoon Kwon
  • Raphael A. Espinoza

Abstract

This paper assesses the extent of regional financial integration in the Caribbean Community (CARICOM) by analyzing equity prices in the region and rigidity of external financing constraints. The results are presented in a cross-regional perspective. The Caribbean stock markets are not as well integrated as one would expect from the extent of cross-listing and importance of regional banking groups: price differentials of cross-listed stocks reach an average of 5 percent. Auto-Regressive models suggest that these price differentials are only slowly arbitraged away, with half-lives exceeding 7 worked days, even when looking only at large arbitrage opportunities (using a Threshold Auto-Regressive model). A speculative methodology using macroeconomic data seems to confirm these findings. A strong mean reversion of the current account (respectively regional trade imbalances) is interpreted, following Obstfeld and Taylor (2004), as a lack of ways to finance current account deficits, i.e. a lack of global (respectively regional) financial integration. The region appears to be much less integrated than the EU15 or the ASEAN+3 groups, although it fares well compared to other LDCs.

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Bibliographic Info

Paper provided by International Monetary Fund in its series IMF Working Papers with number 09/139.

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Length: 35
Date of creation: 01 Jul 2009
Date of revision:
Handle: RePEc:imf:imfwpa:09/139

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Keywords: Capital flows; Economic models; Stock markets; Trade integration; equation; bond; correlation; stock exchange; stock prices; stock market; financial sector; heteroscedasticity; statistics; standard deviation; financial institutions; stock exchanges; portfolio investment; stock price; mean group; probability; mean group estimator; time series; equations; econometrics; bond markets; financial markets; maximum likelihood estimator; bond estimator; stock market capitalization; statistical significance; financial derivatives; surveys; equity securities; stata; financial liberalization; standard errors; samples; statistical inference; outliers; international capital; random variable; dummy variable; stock market indexes; stock market indices; stochastic process; random walk; correlations; finite sample; predictions; scatter plot; bond estimators; equity markets; financial stability; constant term; estimation procedure; autocorrelation; normal distribution; survey; stock price indexes; liquid asset; money market; financial system; financial economics; financial conglomerates; international capital mobility; bond yields;

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References

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Citations

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Cited by:
  1. M. Kabir Hassan & Geoffrey M. Ngene & Jung Suk-Yu, 2011. "Credit Default Swaps and Sovereign Debt Markets," NFI Working Papers 2011-WP-03, Indiana State University, Scott College of Business, Networks Financial Institute.
  2. Espinoza, Raphael & Prasad, Ananthakrishnan & Williams, Oral, 2011. "Regional financial integration in the GCC," Emerging Markets Review, Elsevier, Elsevier, vol. 12(4), pages 354-370.

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