Engine for Dynamism and Stability
Edited by Masahiro Kawai, Jong-Wha Lee, Peter A. Petri and Giovanni Capanelli
Chapter 7: Patterns and Determinants of Financial Integration in Asia
* Jong-Wha Lee International capital mobility in East Asia has increased rapidly since the early 1990s, reflecting the commitment among economies in the region to continue deregulating financial markets. But although the process has seen the region’s economies integrate into global financial markets, it is not clear that the process has contributed significantly to the integration of financial markets within the region. Several studies suggest that links between intraregional financial markets in East Asia are still low, particularly compared to Europe, and instead favor integration at a global level (Eichengreen and Park 2005a; Kim et al. 2008). In this regard, it is important to understand the patterns of cross-border capital flows and the forces that have influenced them in East Asia. This chapter analyzes these patterns and investigates the forces that have determined the degree of financial integration. It compiles data on cross-border holdings of international financial assets including equity portfolio, long-term and short-term debt securities and bank claims from 1997 to 2004. It then analyzes the geographical composition of cross-border financial asset holdings in East Asia and compares them with Europe. A gravity model of bilateral financial asset holdings is then adopted to investigate the factors determining the patterns of cross-border holdings of international financial assets – such as total portfolio assets and individual assets including equity portfolio, long-term and short-term debt securities and bank claims – in East Asia. The empirical results demonstrate that the level of financial integration among East Asian economies, particularly in equity portfolio and debt securities markets,...
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