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Financial integration in emerging market economies

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  • Pasricha, Gurnain

Abstract

This paper analyzes de-facto integration in some Emerging Market Economies based on behavior of deviations from Covered Interest Parity in the last 10 years. A price-based measure of de-facto integration provides crucial information for answering policy questions related to impact of capital openness and of effectiveness of controls. An Asymmetric Self Exciting Threshold Autoregressive model is used to estimate bands of speculative inaction. The estimated bands follow the pattern expected, and reveal a rational market in the sense that deviations from parity are self correcting. The paper uses information from the estimated models to construct a new index of de-facto integration.

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Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 8220.

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Date of creation: 10 Apr 2008
Date of revision: 10 Apr 2008
Handle: RePEc:pra:mprapa:8220

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Keywords: Covered Interest Parity; Threshold Autoregression; Financial Integration; Integration Index; Emerging Markets;

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References

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  1. Nicolas E. Magud E. & Carmen M. & Kenneth S. Rogoff, 2011. "Capital Controls: Myth and Reality--A Portfolio Balance Approach," Working Paper Series WP11-7, Peterson Institute for International Economics.
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  3. Kose, Ayhan & Prasad, Eswar & Rogoff, Kenneth & Wei, Shang-Jin, 2006. "Financial Globalization: A Reappraisal," CEPR Discussion Papers 5842, C.E.P.R. Discussion Papers.
  4. Bernardo S. de M. Carvalho & Márcio G. P. Garcia, 2008. "Ineffective Controls on Capital Inflows under Sophisticated Financial Markets: Brazil in the Nineties," NBER Chapters, in: Financial Markets Volatility and Performance in Emerging Markets, pages 29-96 National Bureau of Economic Research, Inc.
  5. Rhee, S Ghon & Chang, Rosita P, 1992. " Intra-day Arbitrage Opportunities in Foreign Exchange and Eurocurrency Markets," Journal of Finance, American Finance Association, vol. 47(1), pages 363-79, March.
  6. Gian-Maria Milesi-Ferretti & Philip R. Lane, 2005. "Financial Globalization and Exchange Rates," IMF Working Papers 05/3, International Monetary Fund.
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  8. Cheung, Yin-Wong & Chinn, Menzie D. & Fujii, Eiji, 2006. "The Chinese economies in global context: The integration process and its determinants," Journal of the Japanese and International Economies, Elsevier, vol. 20(1), pages 128-153, March.
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  12. Chinn, Menzie D. & Ito, Hiro, 2006. "What matters for financial development? Capital controls, institutions, and interactions," Journal of Development Economics, Elsevier, vol. 81(1), pages 163-192, October.
  13. Ilan Goldfajn & André Minella, 2007. "Capital Flows and Controls in Brazil: What Have We Learned?," NBER Chapters, in: Capital Controls and Capital Flows in Emerging Economies: Policies, Practices and Consequences, pages 349-420 National Bureau of Economic Research, Inc.
  14. Sebastian Edwards, 2007. "Capital Controls, Sudden Stops, and Current Account Reversals," NBER Chapters, in: Capital Controls and Capital Flows in Emerging Economies: Policies, Practices and Consequences, pages 73-120 National Bureau of Economic Research, Inc.
  15. Joshua Aizenman, 2004. "Financial Opening and Development: Evidence and Policy Controversies," American Economic Review, American Economic Association, vol. 94(2), pages 65-70, May.
  16. Reinhart, Carmen & Kaminsky, Graciela, 1999. "The twin crises: The causes of banking and balance of payments problems," MPRA Paper 14081, University Library of Munich, Germany.
  17. 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, vol. 51(2), pages 3.
  18. Chinn, Menzie & Frankel, Jeffrey, 1994. "Patterns in Exchange Rate Forecasts for Twenty-five Currencies," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 26(4), pages 759-70, November.
  19. Philip R. Lane & Gian Maria Milesi-Ferretti, 2006. "The External Wealth of Nations Mark II: Revised and Extended Estimates of Foreign Assets and Liabilities,1970–2004," The Institute for International Integration Studies Discussion Paper Series iiisdp126, IIIS.
  20. Clinton, Kevin, 1988. "Transactions Costs and Covered Interest Arbitrage: Theory and Evidence," Journal of Political Economy, University of Chicago Press, vol. 96(2), pages 358-70, April.
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Citations

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Cited by:
  1. Michael M Hutchison & Gurnain Kaur Pasricha & Nirvikar Singh, 2012. "Effectiveness of Capital Controls in India: Evidence from the Offshore NDF Market," IMF Economic Review, Palgrave Macmillan, vol. 60(3), pages 395-438, September.
  2. A. Prasad & Charles Frederick Kramer & Hélène Poirson, 2008. "Challenges to Monetary Policy from Financial Globalization: The Case of India," IMF Working Papers 08/131, International Monetary Fund.
  3. Hutchison, Michael & Kendall, Jake & Pasricha, Gurnain & Singh, Nirvikar, 2010. "Indian Capital Control Liberalization: Evidence from NDF Markets," MPRA Paper 21771, University Library of Munich, Germany.
  4. Gurnain Kaur Pasricha, 2009. "Bank Competition and International Financial Integration:Evidence Using a New Index," Working Papers 242009, Hong Kong Institute for Monetary Research.
  5. Pasricha, Gurnain Kaur, 2008. "Imperfect Competition in Financial Markets and Capital Controls: A Model and a Test," MPRA Paper 12125, University Library of Munich, Germany.
  6. Olesia Kozlova, 2013. "Forward-Rate Bias, Imperfect Knowledge, and Risk: Evidence from Developed and Developing Countries," 2013 Papers pko627, Job Market Papers.

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