New evidence of financial integration in Asian markets

Abstract

This paper measures the extent of interdependence suggestive of financial market integration among Asian equity markets after January 1993 until December 2010 using daily data. The analysis includes three developed (Hong Kong, Japan and Singapore) and eight emerging (China, India, Indonesia, Korea, Malaysia, the Philippines, Taiwan, and Thailand) markets. The methodology uses panel unit root tests to test for nonstationarity, and conducts multivariate cointegration, Granger causality and level VAR procedures and variance decomposition to examine the equilibrium and causal relationships between these markets. The results indicate that there is a stationary long-run equilibrium relationship among, and significant and substantial short and long run causal linkages between these Asian equity markets. This evidence suggests that a high level of financial integration currently exists in the Asian region, notwithstanding the absence of extensive formal regional agreements aimed at promoting financial integration as found elsewhere, especially in the European Union.