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 twelve Asian economies using a new modeling approach combining DF with ECM. This approach enables 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.