International Journal of Business and Social Science Vol. 4 No. 17 [Special Issue – December 2013] 246 Financial Integration among ASEAN+3 Countries: Evidence from Exchange Rates Convergence Lee Chin Department of Economics Faculty of Economics and Management Universiti Putra Malaysia 43400 UPM Serdang, Selangor, Malaysia M. Azali Department of Economics Faculty of Economics and Management Universiti Putra Malaysia 43400 UPM Serdang, Selangor, Malaysia Abstract As the economies of Asian have moved towards closer economic ties in recent years, the establishment of regional exchange rate arrangement has become an important regional policy concern. A study by the Asian Development Bank forecast that Asian will be the world's largest economy by 2050. Hence, it is not reasonable for Asian to continuously depend on U.S. dollar. Asian must have its own currency and must responsible for its own financial stability. Regional cooperation (including integration) is critical for Asia’s march toward prosperity and facing vulnerabilities to global shocks. Financial integration in ASEAN+3 is assessed in this paper by examining the time-series stochastic behaviour and cointegration in a set of eight ASEAN+3 currencies. The findings imply that not all of the ASEAN+3 countries are financial integrated during the recent float. This finding provided weak support upon formation of regional monetary and exchange rate arrangement in Asia. Key Words: Financial Integration, Exchange Rate, Convergence, Cointegration, Granger-causality, Asian 1. Introduction In the era of globalization, economic interdependence of national across the world is increasing. There is a rapid increase in cross-border movement of goods, service, technology and capital. Regional economies, societies and cultures have become more integrated through communication, transportation, and trade. While economic globalization has been occurring for the last several hundred years (since the emergence of international trade), it has begun to occur at an increased rate over the last 20 – 30 years. This recent boom has been largely accounted by the formation of regional trade arrangement, the reduction of trade barriers and the increment in foreign direct investment. Many regional agreements aim to facilitate trade and spur economic growth had been emerged. One of them is The Association of Southeast Asian Nations (ASEAN). The Association of Southeast Asian Nations (ASEAN) was established on 8 August 1967 in Bangkok by Indonesia, Malaysia, the Philippines, Singapore, and Thailand 1 . In the early 1970s, most of the South East Asia did not have a close relationship with the world economy. Economic linkages among the ASEAN have tightened, following the establishment of the Preferential Trade Agreement in 1977 and ASEAN Free Trade Area (AFTA) in 1993. The realization of the ASEAN Free Trade Area in no way lessens the importance of ASEAN’s economic partners. The ASEAN Plus Three cooperation began in 1997 and was institutionalised in 1999 when the Leaders issued a Joint Statement on East Asia Cooperation at their 3 rd ASEAN Plus Three Summit in Manila. Since then, cooperation in economic, and monetary and financial fields between ASEAN and their counterparts from East Asia, namely China, Japan and the Republic of Korea (ROK) had made substantive progress. 1 Brunei Darussalam joined on 8 January 1984, Vietnam on 28 July 1995, Laos and Myanmar on 23 July 1997, and Cambodia on 30 April 1999.