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Financial integration in emerging market economies

Pasricha, Gurnain (2008): Financial integration in emerging market economies.

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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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