How financially integrated are trading blocs in Africa?

This paper assesses the degree of financial integration between three African trading blocs, namely, the Common Market of Eastern and Southern Africa (COMESA), the East African Community (EAC) and the Southern African Development Community (SADC). The paper suggests a measure of financial integration based on the combination of the dynamic conditional correlation-general autoregressive conditional heteroscedastic (DCC-GARCH) and factor models. The results of the empirical analysis show that not all countries within each of the three trading blocs are integrated to their regional factors. Moreover, the finding of the paper shows a ‘decoupling’ between some of the trading blocs. Robustness test is conducted to support the results of the empirical analysis and shows that the proposed method provides a better way to measure integration than other methods, such as the multi-factor R-square method proposed by Pukthuanthong and Roll (2009)