Abstract

In order to attain financial integration using the Feldstein Horoika (FH) model, the real interest rates differentials must be short lived. This paper estimates the degree of financial market integration in South Asian countries (i.e., Pakistan, India, Bangladesh, Sri Lanka and Nepal) utilizing both techniques i.e. FH model and Real Interest Rates Differentials (RIDs). This study shows some degree of integration with the FH model which has increased in post liberalization period since the 1990’s. The estimates from (RIDs) methodology showed that real interest rates differentials of South Asian countries are found to be stationary when compared with the United States, Canada, United Kingdom, Germany, Sweden, Netherlands, Australia, Malaysia, Indonesia, South Korea, Singapore, China and Japan. The empirical evidence of integration using both techniques is a unique finding in the literature. Even though the RIDs technique provides strong evidence of integration, correlation between savings and investment is still significant.

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