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Goohoon Kwon and Mr. Raphael A Espinoza
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.
Goohoon Kwon and Mr. Raphael A Espinoza

millions U.S. dollars, 2001) 3. UNCTAD FDI Outward Stock (In millions of U.S. dollars, 2001) 4. Regional Exports, as a Share of GDP 5. Interest Rates: Principal Component Analysis, 1980m1–2005m12 6. Interest Comovements 7. Cross-Listed Stocks 8. Cross-Market Premium 9. (G) ARCH-AR Model 10. (G) ARCH-TAR Model 11. β Coefficient from 1975–2005 12. β Coefficient from 1975–90 13. β Coefficient from 1991–2005 14. Regional Financial Integration 1975–2005 15. 1975–90 Estimates of Regional Financial Integration 16. 1991–2005 Estimates of Regional

Mr. Sanjaya P Panth, Mr. Paul Cashin, and Mr. W. A Bauer

Caribbean Trade Preferences in the Work of the IMF Figures 2.1. Market Shares of Regional Banks in CARICOM 2.2. Foreign Ownership of Banks 2.3. Foreign Ownership and Foreign Liabilities 2.4. Public Sector Debt Financed by Other CARICOM States, end-2005 2.5. Cross-Country Standard Deviation of Short-Term Interest Rate, Adjusted for Exchange Rates 2.6. Number of Cross-Listings in Caribbean Stock Exchanges 2.7. Average Cross Market Premium 2.8. Equity Prices and Cross-Market Premia in CARICOM 2.9. Cross-Market Premia in Various Regional

Goohoon Kwon and Mr. Raphael A Espinoza

assess the extent of financial integration for emerging markets is less common. Levy Yeyati et al. (2006) estimate the Auto-Regressive dynamics (AR) of the cross-market premium, i.e. the premium between the prices of two identical stocks traded in two different markets. Since it is known that standard AR regressions underestimate convergence speeds in presence of non-linearities, the authors also use of a Threshold Auto-Regressive model (TAR). They use data of stocks listed in several emerging markets that are also cross-listed in the U.S., and estimate that the

Mr. Raphael A Espinoza, Mr. Oral Williams, and Mr. Ananthakrishnan Prasad

opportunity is therefore a measure of the transaction cost that affects the trading of the two equivalent assets. We investigate the size and dynamics of this price differential in the following sections, with a primary focus on GCC assets. B. Method Cross-listed stocks have been used in many studies of pricing behavior but the paper from which we borrow is that of Levy Yeyati et al. (2006) , who estimate Auto-Regressive (AR) models of the cross-market premium, i.e. the premium between the prices of cross-listings. The authors chose stocks cross-listed in the

Mr. Raphael A Espinoza, Mr. Oral Williams, and Mr. Ananthakrishnan Prasad
We investigate the extent of regional financial integration in the member countries of the Gulf Cooperation Council. The limited volume data available suggests that regional integration is non-negligible. Bahrain and Kuwait investments especially are oriented towards the region. The development of stock markets in the region will also improve the extent of financial integration. Interest rate data shows that convergence exists and that interest rate differentials are relatively short-lived-especially compared to the ECCU, another emerging market region sharing a common currency. Equities data using cross-listed stocks confirms that stock markets are fairly integrated compared to other emerging market regions, although financial integration is hampered by market illiquidity.
Mr. Jörg Decressin, Mr. Wim Fonteyne, and Mr. Hamid Faruqee

not only price- but also quantity-based measures (such as cross-holdings and diversification) and legal and institutional measures (such as dispute resolution). 3 In the case of equities this involves issues related to the comparability of underlying assets. Levy-Yeyati, Schmukler, and Van Horen (2006) control for this by examining the “cross-market premium” or price differential of cross-listed stocks on multiple exchanges as a measure of financial integration. 4 But whereas “money”—as a medium of exchange—eliminates the need for “double

Mr. Jörg Decressin, Mr. Wim Fonteyne, and Mr. Hamid Faruqee

.ecb.int ). A second indicator provided there is based on the proportion of variance in local equity returns explained by euro area versus U.S. shocks. 6 Fratzscher (2001) and Adjaouté and Danthine (2001) find increased correlation among EMU stock returns. However, Adjaouté and Danthine (2004a) find instability in correlation measures from their previous study. 7 To control for inherent differences in the underlying asset(s), Levy-Yeyati, Schmukler, and Van Horen (2006) examine the “cross-market premium” or price differential of the same, cross

Andreas Bauer, Cashin Paul, and Mr. Sanjaya P Panth

the United States and various emerging markets but similar to differentials among ASEAN stock exchanges. 10 Figure 2.7 . Average Cross Market Premium (In percent) Sources: Country authorities; and Fund staff estimates. Figure 2.8 . Equity Prices and Cross-Market Premia in CARICOM Sources: Barbados Stock Exchange; Jamaica Stock Exchange; and Trinidad and Tobago Stock Exchange. Figure 2.9 . Cross-Market Premia in Various Regional Markets Source: Bloomberg. Analysis of cross-market premia movements over time provides further strong

Mr. Sanjaya P Panth, Mr. Paul Cashin, and Mr. W. A Bauer
The Caribbean has made substantial progress in recent years in implementing economic reforms, both at the national and regional level. The Caribbean: Enhancing Economic Integration examines the product of the efforts made by Caribbean policymakers to strengthen regional cooperation and integration, which has yielded economic transformation and tighter integration with the global economy. This volume discusses regional financial integration as a means of deepening financial systems and raising regional growth; the relationship between tax incentives and investment, where harmonized regional action is important in seeking to overcome collective actions problems; and the consequences for the Caribbean of the erosion of trade preferences in key export markets. The book is based on empirical research carried out as part of the IMF's regional surveillance work in the Caribbean.