Financial Integration, Economic Instability And Trade Structure In Emerging Markets

In this study, we first estimate the level of financial integration for twenty five emerging stock markets over the last decade. Using a multivariate GARCH(1,1)-M return generating model allowing for partial market integration as well as for the pricing of systematic emerging market risk, we find that these countries still remain to a large extent segmented and that the process of financial integration has been slowed down by the various financial crises that have struck these countries during the 1990s. We then investigate the relationship between the level of a country's trade concentration and its level of financial integration, postulating that financial integration could act as a natural hedge against potential lack of trade diversification. We find that, indeed, countries with an undiversified trade structure tend to have less segmented financial markets. Finally, our results also suggest that countries less open to trade are more segmented.