Financial integration relationships and linkages in east African community (EAC) equity markets

Abstract

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.