Abstract
Financial integration is a multidimensional process through which allocation of financial assets becomes increasingly borderless. This paper assesses the progress achieved thus far in capital market integration in Asia, and compares regional capital market integration with global financial integration. The results of the analysis on which the paper is based indicate that while the pace of regional integration of financial markets in Asia's emerging economies has accelerated in recent years, these markets remain more integrated with global financial markets than with other financial markets in the region. Further, integration of the region's domestic local-currency bond markets with their regional and global counterparts lags the pace of integration of its equity markets. The study also assesses the degree to which volatility in equity- and bond-market returns driven by financial turmoil originating at both the regional and global levels spills over into emerging Asia domestic equity and bond markets. The results of this analysis indicate that such spill-over significantly impacts both domestic equity and bond markets in the region. This finding suggests that ongoing regional capital market integration initiatives should take into account the risk of contagion that regional financial integration presents, and introduce measures for mitigating such risk as a means of ensuring financial stability in the region.
Highlights
As articulated by Cavoli, Rajan, and Siregar (2004) in their survey of East Asian financial integration, financial integration is a multidimensional process closely associated with development of financial markets
The extent of spillover is much weaker than for the equity markets at both the regional and global levels. These results suggest that Asian currency bond markets generally remain fragmented regionally and segmented from global markets
The degree to which emerging Asia domestic capital markets are integrated with regional and global markets has important implications for policymaking as it relates to the financial sector development in general, and regulatory supervision of the financial system in particular
Summary
As articulated by Cavoli, Rajan, and Siregar (2004) in their survey of East Asian financial integration, financial integration is a multidimensional process closely associated with development of financial markets. It is unsurprising that the deregulation of the financial sector in Asia that began during the 1980s and resulted in a significant increase in cross-border financial transactions led to the region's ongoing financial integration. During the period following the Asian financial crisis of 1997, many Asian economies modernized their financial sectors and strengthened linkages with the financial sectors of other economies in the region. This has led to considerable maturation of many of the region's domestic capital markets, its local-currency bond markets in particular. Intra-regional financial sector policy coordination has likewise strengthened, as demonstrated by the ongoing development of regional arrangements for macroeconomic monitoring and liquidity support. There remains significant variation in the degree to which the region's domestic capital markets have matured and integrated with others in the region and beyond
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