Abstract
Using both quantity- and price-based measures of financial integration, the paper shows an increasing degree of financial openness and integration in emerging Asia. Assessing the impact of a regional shock relative to a global shock on local equity and bond markets, the findings suggest that the region's equity markets are integrated more globally than regionally, although the degrees of both regional and global integration have increased significantly since the 1997/1998 Asian financial crisis. However, emerging Asia's local currency bond markets remain generally segmented, being neither regionally nor globally integrated. There are potential benefits from increased regional integration of financial markets. Financial integration at the regional level allows for the region's economies to benefit from allocation efficiency and risk diversification. Policymakers in the region must strike the right balance between maximizing the net benefits from regional and global financial openness, and minimizing the potential costs of financial contagion and crisis.
Highlights
The 1997/98 Asian financial crisis motivated the drive toward regional financial integration in Asia
Tighter global integration translates into increased spillovers from a global shock that impact the returns and volatilities of regional equities
The degree of regional and global financial market integration is an important issue for Asian policymakers
Summary
The 1997/98 Asian financial crisis motivated the drive toward regional financial integration in Asia. The rationale behind the drive was based on the region’s shared understanding that the absence of regional capital markets and largely underdeveloped domestic financial systems were the major hurdle to channeling the region’s savings into investments within emerging Asia. Recognizing the fundamental weaknesses behind this irony, Asian policymakers have undertaken various reforms to develop more efficient and stable financial systems since the 1997/98 crisis. They have started a number of collective initiatives to strengthen regional financial markets and promote integration. These important initiatives include regional economic surveillance processes in the Association of Southeast Asian Nations (ASEAN) and ASEAN Plus Three (ASEAN+3), the Chiang Mai Initiative (CMI), the Asian Bond Markets Initiatives (ABMI), and the Asian Bond Fund Initiative
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