Global and regional financial integration in East Asia and the ASEAN

Abstract

Financial integration is East Asia and the ASEAN nations is investigated using a new approach based on entropy theory. An important advantage of the proposed framework is that it takes into account changes in integration arising from higher order moments including coskewness and cokurtosis as well as more traditional measures based on second order moments. The analysis focusses on the role of the U.S. in understanding changes in global integration over time, as well as changes in regional integration arising from China. Using daily stock returns from 1997 to 2016, the empirical results show an overall trend to improvements in financial integration over time with deviations from the trend occurring during periods of financial crises in Asia in 1997–98, the U.S. in 2007–10 and the recent European debt crisis. The influence of the Chinese economy mainly through its trading linkages is found to be an important determinant of financial integration over time both regionally as well as globally.