This paper investigates financial integration and linkage relationships amongst equity
markets in East Africa Community over time by determining the speed and levels of
integration 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 there are trends towards full
integration. Correlation analysis suggests strong significant relationships amongst EAC
equity market returns. Johansen Cointegration 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 opportunities 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 efficiency 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.
Key Words: East Africa Community (EAC), East Africa Monetary Union (EAMU), Dar
es Salaam Stock Exchange (DSE), Financial Integration, Nairobi Securities Exchange
(NSE), Uganda stock Exchange (USE).