Measuring Financial and Economic Integration with Equity Prices in Emerging Markets

Abstract This paper examines real and financial links simultaneously at the regional and global level for a group of Pacific-Basin countries by analysing the covariance of excess returns on national stock markets over the period 1980–1998. We find overwhelming evidence at the regional and global level and for all sub-periods that financial integration is accompanied by economic integration. This seems to suggest that economic integration provides a channel for financial integration, which explains, at least partly, the high degree of financial integration found in this study and in other studies for this region even in the presence of foreign exchange controls. This result has important implications for the use of restrictions to isolate capital markets from world influences.