Regional Financial Integration in the Caribbean: Evidence From Financial and Macroeconomic Data
IMF Working Papers, July 1, 2009
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Bibliographic details
- Authors: Goohoon Kwon, Raphael A Espinoza
- Published: July 1, 2009
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781451872866.001
Objective and scope
- Assess the extent of regional financial integration in the Caribbean Community (CARICOM) by analyzing equity prices and rigidity of external financing constraints.
- Present results in a cross-regional perspective.
Key empirical findings
- Price differentials of cross-listed stocks reach an average of 5 percent.
- Auto-Regressive models indicate these price differentials are only slowly arbitraged away, with half-lives exceeding 7 worked days.
- Threshold Auto-Regressive model results show persistence even when focusing on large arbitrage opportunities.
- A speculative macroeconomic-data methodology corroborates equity-market evidence.
- 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.
Comparative assessment
- The Caribbean region appears much less integrated than the EU15 or the ASEAN+3 groups.
- The region fares well compared to other LDCs.
Methodology highlights
- Equity-price analysis emphasizing cross-listed stocks and cross-market premia.
- Time-series models: Auto-Regressive and Threshold Auto-Regressive frameworks used to estimate speed of arbitrage and persistence of price differentials.
- Macroeconomic speculative methodology: examination of current account dynamics and regional trade imbalances to infer financing constraints and integration.
Interpretation and implications
- Persistent cross-listed stock price differentials and slow arbitrage suggest frictions or barriers to rapid price convergence within CARICOM equity markets.
- Mean reversion in current account and trade imbalances signals limited channels for financing deficits, implying constrained global and regional financial integration.
- The combination of market-level price evidence and macro-level current account dynamics provides a consistent picture of incomplete regional financial integration in the Caribbean.
Regional Financial Integration in the Caribbean: Evidence From Financial and Macroeconomic Data — Goohoon Kwon, Raphael A Espinoza (IMF Working Paper No. 2009/139, July 1, 2009).