Determinants of Financial Integration in the East Asia-Pacific Region

Abstract

In this paper we argue about the determinants that influence the process of financial market integration in the East Asia-Pacific region. We question whether GDP, Exchange rate and real interest rate influence the financial integration. We construct a regression specification with respect to a probit/tobit panel model for our data set of the selected East AsiaPacific countries over the 1990–2005 period. Generally, we find that macroeconomic indicators of the members are associated with higher or lower probability of integrating their financial markets and GDP has a positive effect on financial integration, while the results related to exchange rate and interest rate are ambiguous. The implication is that the elimination of exchange rate risk within the East Asia-Pacific region means the common currency, which reduces the remaining differences of investment and consumption opportunities across the member countries of the East Asia-Pacific during the implementation of financial integration.