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Crises, capital controls, and financial integration

  • Yeyati, Eduardo Levy
  • Schmukler, Sergio L.
  • Van Horen, Neeltje

This paper analyzes the effects of capital controls and crises on international financial integration, using data on stocks from emerging economies that trade in domestic and international markets. The cross-market premium (the ratio between the domestic and international market price of cross-listed stocks) provides a valuable measure of how capital controls and crises affect integration. The paper shows that, contrary to the common perception that capital controls can be easily evaded, they do affect the cross-market premium. Controls on capital inflows put downward pressure on domestic markets relative to international ones, generating a negative premium. The opposite happens with controls on capital outflows. This signals the inability of market participants to engage in perfect arbitrage, due to the segmentation of domestic markets from international ones induced by capital controls. Crises affect financial integration by generating more volatility in the cross-market premium and putting more downward pressure on domestic prices.

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Paper provided by The World Bank in its series Policy Research Working Paper Series with number 4770.

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Date of creation: 01 Nov 2008
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Handle: RePEc:wbk:wbrwps:4770
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  1. Edison, Hali J. & Reinhart, Carmen M., 1999. "Capital controls during financial crises: the cases of Malaysia and Thailand," Proceedings, Federal Reserve Bank of San Francisco, issue Sep, pages 1-36.
  2. repec:kap:eurfin:v:10:y:2006:i:1:p:153-187 is not listed on IDEAS
  3. Yeyati, Eduardo Levy & Schmukler, Sergio L. & Van Horen, Neeltje, 2007. "Emerging market liquidity and crises," Policy Research Working Paper Series 4445, The World Bank.
  4. Stiglitz, Joseph E., 2000. "Capital Market Liberalization, Economic Growth, and Instability," World Development, Elsevier, vol. 28(6), pages 1075-1086, June.
  5. Levy Yeyati, Eduardo & Schmukler, Sergio L. & Van Horen, Neeltje, 2006. "International financial integration through the law of one price," Policy Research Working Paper Series 3897, The World Bank.
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  7. Eduardo Levy Yeyati & Augusto de la Torre & Sergio Schmukler, 2003. "Living and Dying with Hard Pegs: The Rise and Fall of Argentina´s Currency Board," Business School Working Papers catorce, Universidad Torcuato Di Tella.
  8. Gozzi, Juan Carlos & Levine, Ross & Schmukler, Sergio L., 2008. "Patterns of international capital raisings," Policy Research Working Paper Series 4687, The World Bank.
  9. 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.
  10. Peter Blair Henry, 2006. "Capital Account Liberalization: Theory, Evidence, and Speculation," NBER Working Papers 12698, National Bureau of Economic Research, Inc.
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  13. Maurice Obstfeld, 1992. "Risk-Taking, Global Diversification, and Growth," NBER Working Papers 4093, National Bureau of Economic Research, Inc.
  14. Fernando A. Broner & Guido Lorenzoni & Sergio L. Schmukler, 2007. "Why Do Emerging Economies Borrow Short Term?," NBER Working Papers 13076, National Bureau of Economic Research, Inc.
  15. Kevin Cowan & Jose De Gregorio, 2005. "International Borrowing, Capital Controls and the Exchange Rate: Lessons from Chile," NBER Working Papers 11382, National Bureau of Economic Research, Inc.
  16. 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," William Davidson Institute Working Papers Series 513, William Davidson Institute at the University of Michigan.
  17. Kenneth Rogoff, 1999. "International Institutions for Reducing Global Financial Instability," Journal of Economic Perspectives, American Economic Association, vol. 13(4), pages 21-42, Fall.
  18. Ross Levine & Sergio L. Schmukler, 2006. "Internationalization and Stock Market Liquidity," Review of Finance, European Finance Association, vol. 10(1), pages 153-187.
  19. Lawrence H. Summers, 2000. "International Financial Crises: Causes, Prevention, and Cures," American Economic Review, American Economic Association, vol. 90(2), pages 1-16, May.
  20. 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.
  21. 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.
  22. Michael Mussa & Giovanni Dell'Ariccia & Barry J. Eichengreen & Enrica Detragiache, 1998. "Capital Account Liberalization; Theoretical and Practical Aspects," IMF Occasional Papers 172, International Monetary Fund.
  23. 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.
  24. Le Fort Varela, Guillermo & Lehmann, Sergio, 2003. "The unremunerated reserve requirement and net capital flows: Chile in the 1990s," Revista CEPAL, Naciones Unidas Comisión Económica para América Latina y el Caribe (CEPAL), December.
  25. 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.
  26. Ross Levine & Sergio L. Schmukler, 2005. "Internationalization and the Evolution of Corporate Valuation," NBER Working Papers 11023, National Bureau of Economic Research, Inc.
  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.
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