Measuring Regional Market Integration in Developing Asia: a Dynamic Factor Error Correction Model (DF-ECM) Approach

This paper examines empirically the dynamic process of regional market integration in 12 Asian economies using a new modeling approach combining DF with ECM. This approach enables us to obtain latent regional dynamic factors which correspond well with the "foreign" parity variables in theory when a market is imperfectly integrated and which act, in explaining domestic short-run price adjustments, as leading-indicators in an error correction form. The power of the DF-ECM approach is illustrated in its application to measuring market integration in the developing Asian region using monthly data from the past decade.


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