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China, Hong Kong, and Taiwan: A Quantitative Assessment of Real and Financial Integration

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  • Cheung, Yin-Wong
  • Chinn, Menzie David
  • Fujii, Eiji

Abstract

The status of real and financial integration of China, Hong Kong, and Taiwan is investigated using monthly data on one-month interbank rates, exchange rates, and prices. Specifically, the degree of integration is assessed based on the empirical validity of real interest parity, uncovered interest parity, and relative purchasing power parity. There is evidence these parity conditions tend to hold over longer periods, although they do not hold instantaneously. Overall, the magnitude of deviations from the parity conditions is shrinking over time. In particular, China and Hong Kong appear to have experienced significant increases in integration during the sample period. It is also found that exchange rate variability plays a major role in determining the variability of deviations from these parity conditions.

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Bibliographic Info

Paper provided by Department of Economics, UC Santa Cruz in its series Santa Cruz Department of Economics, Working Paper Series with number qt13d9m8jv.

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Date of creation: 01 Oct 2003
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Handle: RePEc:cdl:ucscec:qt13d9m8jv

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Keywords: uncovered interest parity; real interest parity; purchasing power parity; exchange rates; capital mobility; market integration;

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Citations

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Cited by:
  1. Ramiah, Vikash & Cheng, Ka Yeung & Orriols, Julien & Naughton, Tony & Hallahan, Terrence, 2011. "Contrarian investment strategies work better for dually-traded stocks: Evidence from Hong Kong," Pacific-Basin Finance Journal, Elsevier, vol. 19(1), pages 140-156, January.
  2. Yeh, Kuo-chun & Ho, Tai-kuang, 2012. "Magnitude and volatility of Taiwan's net foreign assets against Mainland China: 1981–2009," China Economic Review, Elsevier, vol. 23(3), pages 720-728.
  3. Henry Kim & Soyoung Kim & Yunjong Wang, 2005. "International Capital Flows and Boom-Bust Cycles in the Asia Pacific Region," Discussion Papers Series, Department of Economics, Tufts University 0506, Department of Economics, Tufts University.
  4. Chan, Tze-Haw, 2011. "A structural modeling of exchange rate, prices and interest rates between Malaysia-China in the liberalization era," MPRA Paper 32955, University Library of Munich, Germany.
  5. Alex Luiz Ferreira, 2004. "Are Real Interest Differentials Caused by Frictions in Goods or Assets Markets, Real or Nominal Shocks?," Studies in Economics 0407, Department of Economics, University of Kent.
  6. Gerlach-Kristen, Petra, 2009. "Business cycle and inflation synchronisation in Mainland China and Hong Kong," International Review of Economics & Finance, Elsevier, vol. 18(3), pages 404-418, June.
  7. T. K. Jayaraman & Huay-Huay Lee & Hock-Ann Lee, 2006. "Regional Economic Integration in the Pacific: An Empirical Study," Global Economic Review, Taylor & Francis Journals, vol. 35(2), pages 177-192.
  8. Chow, Hwee Kwan, 2010. "Asian Tigers' Choices: An Overview," ADBI Working Papers 238, Asian Development Bank Institute.
  9. Hwee Kwan Chow, 2010. "Asian Tigers’ Choices : An Overview," Trade Working Papers 21879, East Asian Bureau of Economic Research.
  10. Yin-Wong Cheung & XingWang Qian, 2010. "Capital Flight: China's Experience," Working Papers 062010, Hong Kong Institute for Monetary Research.
  11. James Laurenceson & Kam Ki Tang, . "Estimating China�s de-facto capital account convertibility," EAERG Discussion Paper Series 0205, School of Economics, University of Queensland, Australia.
  12. Zohreh Shirani Fakhr & Seyed Komail Tayebi, 2009. "Determinants of Financial Integration in the East Asia-Pacific Region," Iranian Economic Review, Economics faculty of Tehran university, vol. 14(1), pages 155-173, spring.
  13. Maveyraud-Tricoire, Samuel & Rous, Philippe, 2009. "RIP and the shift toward a monetary union: Looking for a "euro effect" by a structural break analysis with panel data," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 19(2), pages 336-350, April.
  14. Chan, Tze-Haw & Baharumshah, Ahmad Zubaidi, 2012. "Financial Integration between China and Asia Pacific Trading Partners: Parities Evidence from the First- and Second-generation Panel Tests," MPRA Paper 37801, University Library of Munich, Germany.
  15. Lee, Chin, 2010. "Purchasing power parity and free trade area," MPRA Paper 40431, University Library of Munich, Germany.

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