Crises, Capital Controls, and Financial Integration
This paper analyzes the effects of capital controls and crises on international financial integration, using data on stocks from emerging economies that trade in domestic and international markets. The cross-market premium (the ratio between the do...
| Main Authors: | , , |
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| Format: | Policy Research Working Paper |
| Language: | English |
| Published: |
World Bank, Washington, DC
2012
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| Subjects: | |
| Online Access: | http://documents.worldbank.org/curated/en/2008/11/10000577/crises-capital-controls-financial-integration http://hdl.handle.net/10986/6386 |
| Summary: | This paper analyzes the effects of
capital controls and crises on international financial
integration, using data on stocks from emerging economies
that trade in domestic and international markets. The
cross-market premium (the ratio between the domestic and
international market price of cross-listed stocks) provides
a valuable measure of how capital controls and crises affect
integration. The paper shows that, contrary to the common
perception that capital controls can be easily evaded, they
do affect the cross-market premium. 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 induced by capital controls.
Crises affect financial integration by generating more
volatility in the cross-market premium and putting more
downward pressure on domestic prices. |
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