Financial integration relationships and linkages in east African community (EAC) equity markets
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Date
2014-10Author
Kaijage, Erasmus S.
Duncan, Elly
Language
enMetadata
Show full item recordAbstract
This paper investigates financial integration and linkage relationships amongst equity
markets in East Africa Community over time by determining the speed and levels of
integra
tion using monthly market return data for the period 2007 to 2013. The study also
examines the short run and long run relationships amongst the markets. The study was
motivated by the ongoing plans of establishment of the East Africa Monetary Union
(EAMU)
which will be characterized by mobility of labor and capital as factors of
production across the member states.
Using beta and sigma convergence measures, the study notes that financial integration
has not deepened in the EAC over the years though ther
e are trends towards full
integration. Correlation analysis suggests strong significant relationships amongst EAC
equit
y market returns. Johansen Co
integration tests suggest existence of three stochastic
trends in the equity markets. Vector auto regression
analysis and impulse response
analysis suggest linkages amongst the markets hinging on the NSE and mean reversion in
all the equity markets.
The study findings suggest that
the EAC equity markets are weak
form efficient and there are arbitraging opportuni
ties across the equity markets. The
responses to the shocks in any of the markets are found to be dependent on the
relationships between the markets.
From the study findings, it is inferred that the roadmap to EAMU should be fast tracked
by facilitating e
fficiency in the EAC markets where rates of return are market
determined. Policy initiatives should be put in place to eliminate arbitrage opportunities
across the markets and to encourage capital mobility through the equity markets. To
support integration
, there should be academic studies on the existence of home bias in the
EAC equity market segments.
Publisher
University of Nairobi