Regional Financial Integration in the Caribbean: Evidence From Financial and Macroeconomic Data

July 1, 2009

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Goohoon Kwon, and Raphael A Espinoza. Regional Financial Integration in the Caribbean: Evidence From Financial and Macroeconomic Data, (USA: International Monetary Fund, 2009) accessed November 21, 2024

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

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.

Subject: Balance of payments, Current account, Economic integration, Financial institutions, Financial integration, Financial markets, Regional integration, Stock markets, Stocks

Keywords: Balance of payments, Caribbean, CARICOM, CARICOM community, CARICOM firm, CARICOM group, Cross-listed stock, Cross-market premium, Current account, Current account dynamics, Exchange rate, Financial integration, Global, Liquid asset, Market capitalization, Price convergence, Regional integration, Stock markets, Stocks, Threshold Auto-Regressive model, Trade balance, WP

Publication Details

Pages:

35
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2009/139
Stock No:

WPIEA2009139
ISBN:

9781451872866
ISSN:

1018-5941

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