Crises, Capital Controls, and Financial Integration
Yeyati, Eduardo Levy; Schmukler, Sergio
L.; Horen, Neeltje
Van | November 2008
Abstract
This paper analyzes the effects of capital controls and crises on financial integration, using stocks from emerging economies that trade in both domestic and international markets. The cross-market premium (the ratio between the domestic and the international market price of cross-listed stocks) provides a valuable measure of how capital controls and crises affect international financial integration. The paper shows that, contrary to the common perception that capital controls can be easily evaded, they do affect the cross-market premium in a sustainable way. 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. Crises affect financial integration by generating more volatility in the premium and putting more downward pressure on domestic prices.
Citation
Yeyati, Eduardo Levy; Schmukler, Sergio L.; Horen, Neeltje Van. 2008. Crises, Capital Controls, and Financial Integration. © Asian Development Bank. http://hdl.handle.net/11540/3709. License: CC BY 3.0 IGO.Keywords
Financial Stability
Financial Management System
Financial Restructuring
Capital Market Development
Erosion
Market Development
Economics
Erosion
International Economics
International Financial Market
Multilateral Financial Institutions
Economic Recession
Market
Crisis
Business recessions
Multilateral development banks
Regulatory reform
Capital
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