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Financial Integration in Emerging Market Economies

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Pasricha, Gurnain

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Abstract

This paper analyzes the de-facto integration in some Emerging Market Economies based on behavior of deviations from Covered Interest Parities in the last 10 years. It tests for modified market efficiency conditions in the presence of real world frictions and arrives at a single measure of de-facto integration for some Emerging Market Economies in the post-globalization era. An Asymmetric Self Exciting Threshold Autoregressive model (SETAR) is used to estimate bands of speculative inaction. Market efficiency requires the thresholds to be no wider than the transaction costs and the deviations to follow a stationary process outside the chosen bands. The analysis reveals a much more efficient financial market than has been allowed for in previous studies. The estimates of thresholds for emerging markets follow the pattern expected, given information on de-jure restrictions. Based on the estimated model, the paper constructs an index of de-facto integration and we find that Phillipines and India are the highest ranked amongst emerging markets in terms of their financial integration, and that Malaysia and Thailand occupy the lowest spot.

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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 5278.

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Date of creation: Oct 2007
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Handle: RePEc:pra:mprapa:5278

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Related research
Keywords: Covered Interest Parity Financial Integration Integration Index TAR

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Find related papers by JEL classification:
F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration
F30 - International Economics - - International Finance - - - General
F3 - International Economics - - International Finance

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    Other versions:
  2. Frenkel, Jacob A & Levich, Richard M, 1975. "Covered Interest Arbitrage: Unexploited Profits?," Journal of Political Economy, University of Chicago Press, vol. 83(2), pages 325-38, April. [Downloadable!] (restricted)
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  6. Isabel Vieira, 2003. "Evaluating capital mobility in the EU: a new approach using swaps data," European Journal of Finance, Taylor and Francis Journals, vol. 9(5), pages 514-532, October. [Downloadable!] (restricted)
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  15. Ilan Goldfajn & André Minella, 2005. "Capital Flows and Controls in Brazil: What Have We Learned?," NBER Working Papers 11640, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  18. Mark P. Taylor & Elena Tchernykh Branson, 2004. "Asymmetric Arbitrage and Default Premiums Between the U.S. and Russian Financial Markets," IMF Staff Papers, Palgrave Macmillan Journals, vol. 51(2), pages 3. [Downloadable!] (restricted)
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