Assessing Financial Market Integration in Asia - Equity and Bond Markets

Abstract

Since the Asian financial crisis in 1997-1998, economies in the region have made efforts to diversify their reliance on the banking sector in favour of other financial intermediaries such as equities and bonds. Despite the recent development, the degree of intra-regional financial integration appears to lag behind the increase in trade. Such asymmetric development in economic and financial integration may have implications on financial stability. Therefore, it is of interest to monitor the development and progress of financial market integration in the region. Unlike most studies which focus on either the equity market or the bond market integration, this study compares the different experiences of integration of the equity and the government bond markets in the region. To do so, we construct various indicators for measuring different dimensions of equity and bond market integration. A combined use of these indicators would give policy makers a more balanced picture regarding the general trend of equity and bond market integration in the region. Our empirical results broadly show that a lot of progress has been achieved over the years from 1994 to 2001 in the integration among the Asian equity markets. After slowing down between 2002 and 2006, the equity market integration process picked up again in 2007-08. Meanwhile, the degree of integration in the sovereign (government) bond markets in Asia remains low and very little progress has taken place since 2002.