During the last thirty years, many developments contributed to the process of international financial market integration. Removal of capital controls in the 1970s by the major developed countries provided the initial impetus for financial market integration by facilitating cross-border capital movement. Economic liberalization and financial deregulations of the 1980s opened up national markets making way for greater financial integration. As globalization and integration of international goods markets advance with lessening of tariffs and other constraints, there will be further impetus to the changes in the financial markets.
While the financial integration is generally thought to be advancing well among developed countries, evidences have emerged to suggest that markets of many developing countries in the Far East and Latin America are not lagging behind in getting themselves integrated with global financial markets. Massive inflows of capital into these countries following their economic liberalization and financial deregulation in the early 1990s played a key role in this respect and these inflows are not likely to diminish as these countries continue to deregulate and liberalize their financial markets.
When financial markets are integrated, events in one country will have its impact felt in the financial markets of other countries. How quickly and to what extent these impacts will be felt depends on the degree of integration existing at the time. Characteristics of fully integrated financial markets would include equalization of prices of similar financial assets across markets. Market integration has far reaching implications for cross-border capital flows, arbitrage trading, financial management, and monetary policy autonomy. Many studies in the past have investigated the integration issue. Some date back to the 1970s. This issue received added attention among researchers when the eighties rolled in with increased interest in liberalization and deregulation around the world.
Financial market integration studies usually focus on the differentials in the asset prices or sensitivity of international capital flows to asset price differentials. Studies that have used the asset price differential approach have either focused on nominal interest rate or real interest rate differentials. Their examination of the relationships between interest rates was typically carried out from the perspective of parity, covariability and/or convergence to assess the extent of integration.
Almost all past financial market integration studies have focused on developed countries, either because they were the obvious case for the study due to strong economic and financial linkage that exist among them or because of the availability of market data. Only recently, some interest has been shown for the study of the integration issue from the perspective of developing countries. The main purpose of this paper is to examine the issue of financial integration from the perspective of a select group of Latin American countries whose participation in global capital markets since the late eighties is rather well known.
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