Importance of Issue
Integration of financial market has significantly increased during the period of 1980s and 1990s. Wave of recent reforms and internationalization in emerging markets has enhanced linkage within various sectors of national and international markets. Some of the key factors behind this change are increased globalization of investment in order to get higher rates of return and diversification of risk internationally.
Access to world capital markets expands investors' opportunities for portfolio diversification and provides a potential for achieving higher risk-adjusted rates of return. It also allows countries to borrow to smooth consumption in the face of adverse shocks, the potential growth and welfare gains resulting from such international risk sharing can be large (Obstfeld, 1994). Strong integration is present in domestic call money market with the LIBOR and robust co-movement between domestic foreign exchange market and LIBOR (Jain & Bhanumurthy 2005). (Feldstein and Horoika 1980) (F-H) used annual data of OECD countries for the period 1960-74, to test the financial market integration.
Like many other emerging economies, Pakistan also implemented policies of financial sector reform and liberalization as early as the 1990s. These reforms and other external factors had a positive impact on the economy and led to a slight appreciation of the currency as well as improvement in the country's credit rating. As a result of these reforms and deregulation of many sectors of the economy, the movements of important financial market indicators such as exchange rates, stock prices and interest rates became reflective of market forces.
An open and well-integrated financial market helps to maximize the benefits of an increasing globalized economy. A financial market that is well integrated with the rest of the world allows country to smooth its consumption pattern and attract investment from abroad to enhance its productivity. Integration of Financial markets helps developing nations in achieving high economic growth and improve living standard.
This study is structured as follows: the following section discuss literature review related to the financial factors and cash dividends. Third section consists of data, model and methodology description. Data interpretation and results will be discussed in the fourth section. Fifth section is mainly conclusion of the paper followed by the references
Section 2: Literature Review
Integration of financial markets is a process of unifying markets and enabling convergence of risk-adjusted returns on the assets of similar maturity across the markets. The process of integration is facilitated by an unimpeded access of participants to various market segments. Financial markets all over the world have witnessed growing integration within as well as across boundaries, spurred by deregulation, globalization and advances in information technology. Central banks in various parts of the world have made concerted efforts to develop financial markets, especially after the experience of several financial crises in the 1990s. As may be expected, financial markets tend to be better integrated in developed countries. At the same time, deregulation in emerging market economies (EMEs) has led to removal of restrictions on pricing of various financial assets, which is one of the pre-requisites for market integration. Capital has become more mobile across national boundaries as nations are increasingly relying on savings of other nations to supplement the domestic savings. Technological developments in electronic payment and communication systems have substantially reduced the arbitrage opportunities across financial centres, thereby aiding the cross border mobility of funds. Changes in the operating framework of monetary policy, with a shift in emphasis from quantitative controls to price-based instruments such as the short-term policy interest rate, brought about changes in the term structure of interest rates. This has contributed to the integration of various financial market segments. Harmonisation of prudential regulations in line with international best practices, by enabling competitive pricing of products, has also strengthened the market integration process.
Integration is necessary to meet the challenge of globalization. Global economic
integration faci litates the importation of capital and intermediate goods that may
not be available in a country's home market at comparable cost. Similarly, global
markets improve the efficient allocation of resources. In addition, countries gain
better access to financing, and the suppliers of capital - institutional investors
and/or individual savers - receive better returns on their investments. Worldwide
integration also allows for the rapid transfer of ideas and technology, which are
critical ingredients of today's knowledge-based economies.
Hence, regional integration would provide significant advantages in the form of: (i)
lower prices for financial services; (ii) a more efficient, liquid and broader securities
market; (iii) innovative financial products and services; (iv) industrial
transformation of markets; (v) cheaper corporate financing; (vi) more efficient
allocation of capital; and (vii) enhanced risk return frontiers.
Feldstein (1983), Tobin (1983), Penati and Dooley (1984), Dooley et.al. (1984), Sinn (1992) and Bayoumi (1990) also confirmed high Saving-Investment correlation, which indicate low capital mobility. Monadjemi (1990) used both direct and indirect approaches and came up with the same conclusion that capital is not perfectly mobile. Haque and Montiel (1994) estimated the degree of monetary autonomy in developing countries and concluded that the degree of capital mobility is much higher.
Bhoi and Dhal (1998) tried to study this issue by using monthly data up to 1997 the study found that though the domestic financial markets are integrated among themselves, they are not integrated with the world markets. International ï¬nancial market integration has dramatically increased in last two decades, leading to ï¬nancial interconnectedness not only of regions but also of geographically distant countries
Liberalization of the capital account has been impeded in most of the countries due to concerns that international financial integration will stimulate capital inflows, induce appreciation in the real exchange rate and thereby reduce international competitiveness (Dornbusch and Park, 1994). Another policy aspect that arises from the analysis of financial markets is the increasing importance of foreign interest rates in the formation of domestic rates and foreign influence on the local economy in general. The extent of international market integration greatly affects the behavior of exchange and interest rates across countries, which in turn have crucial implications for the degree to which the domestic monetary authorities can pursue independent monetary policies (Agenor, 2001).
The four pillars through which the integration and cooperation will be strengthened among the Asian
countries are: (a) development of regional infrastructure such as ports, roads, airports, shipping and trade
facilitation through which goods and people can cross borders easily; (b) harmonization of taxation,
regulations, laws, etc., so that the transaction costs of doing business within the region can be
minimized; (c) pooling of financial resources and utilizing them within the region for development,
crisis prevention and crisis management; and (d) increased trade of goods and services to capture global
market shares.
Cross-border capital market flows should be allowed gradually and must be
regulated. The WTO's General Agreement on Trade in Services also defines trade in
services, which include financial services, across four modes of supply, which entail
regulation of cross-border services. The IOSCO has also laid out principles for
cooperation which state that "Regulators should establish information sharing
mechanisms that set out when and how they will share both public and non-public
information with their domestic and foreign counterparts"; and that "The regulatory
system should allow for assistance to be provided to foreign regulators who need to
make inquiries in the discharge of their functions and exercise of their powers".
Pakistan faced serious economic difficulties in the last few years particularly 2008 and has been able to achieve some stability in the last few months with the assistance of the IMF. The trouble in Pakistan started because of misgovernance, postponed policy decisions for the sake of short term political expediency, the assassination of the most popular leader and the resulting political instability. Although different observers may have varied interpretations and readings of the Asian crisis in 1997-98 and the ongoing crisis I would attribute the following factors as contributing to the damage control in case of Pakistan.
Section 2: Methodology and Theoretical Framework
(1987). But the most popular test for co-integration was developed by Johansen and Juselius (1990) that tests for the presence of multiple long-run relationships. In this study we use this co-integration approach to examine the integration of returns in both domestic and foreign markets. One of the pre-requisites for undertaking the co-integration framework is that the variables that are expected to have long-run relationship should be non-stationary at their levels and should be stationary at the same order (or difference).The long-run relationship that we are examining here can be expressed as below
it,k= α + β i*t,k
Where 'I' and 'i*' are the return (interest rates) in domestic and foreign markets respectively and the constant term is a wedge parameter between interest rates possibly caused by a risk premium or other asset differences.
Section 4: Empirical Results
Table 1. Sequential ADF unit root tests at levels
Model
lLIBOR
LCMRPAK
lTBPAK
lER
lCMRUK
lTBUK
With Trent & Intercept
-3.042
-1.47
-1.91
-2.91
-1.9
-1.91
With Intercept and no Trend
-2.7067
-1.98
-1.782
-1.471
-1.77
-2.38
With no Intercept & Trend
-1.4
-0.07
-0.151
1.57
-0.1959
-0.661
Result
Has a Unit Root
Has a Unit Root
Has a Unit Root
Has a Unit Root
Has a Unit Root
Has a Unit Root
Table 2. Sequential ADF unit root test on first differences
Model
ΔlLIBOR
ΔlCMRPAK
ΔlTBPAK
ΔlER
ΔlCMRUK
ΔlTBUK
With Trent & Intercept
-4.629
-8.58
-3.41
-5.378
-9.48
-5.71
Result
Does not Have Unit Root
Does not Have Unit Root
Does not Have Unit Root
Does not Have Unit Root
Does not Have Unit Root
Does not Have Unit Root
