The enduring popular representation of financial market integration is the equalisation of the rates of return on similar financial assets. This has considerable intuitive appeal: as markets become more open and unified, differences in rates of return should reflect only fundamental factors such as differences in asset quality, risk and the like. But there are in fact a multiplicity of methods to measure the financial openness of an economy, ranging from simply looking at the various legal restrictions that operate on international finance in a country to using predictions of economic theory to infer the degree of financial integration.

This chapter reviews a number of measures of financial integration as they have been applied to selected east Asian economies. There are a number of standard, well established tests and analyses which provide a benchmark for assessing the degree of integration of markets (Obstfeld 1986a, 1994; Montiel 1993; Goldstein and Mussa 1993). Generally, these examine legal restrictions on the capital account, changes in capital flows, interest rate parity conditions, saving–investment correlations, inter-country consumption correlations and a range of other tests which seek to identify changes in real variables or structural economic relationships which are explicable in terms of financial integration.

Legal restrictions on the capital account

Emery (1991) and Cole, Scott and Wellons (1995a, 1995b) provide some information on the structure of money and foreign exchange markets in east Asia.