Financial Integration in Asset and Liability Holdings in East Asia

46 Pages Posted: 23 Dec 2015

See all articles by Donghyun Park

Donghyun Park

Asian Development Bank - Economic Research

Kwanho Shin

Korea University

Date Written: August 2015

Abstract

In this paper, we examine the evolution of intra-East Asian financial integration from 2001 to 2013. Most existing studies on this topic look primarily at asset holdings; we examine liability holdings as well. Using the International Monetary Fund’s Coordinated Portfolio Investment Survey data for equities, long-term debt, and short-term debt, our analysis generally supports the conventional wisdom that East Asian countries are more financially integrated with global financial centers than they are with each other. This is true for both asset holdings and liabilities and is confirmed by an econometric analysis based on financial gravity equations. However, the gap between global integration and regional integration has narrowed for asset holdings over time but not for liability holdings. The results of additional econometric analysis indicate that the diversification of liability holdings can mitigate financial instability due to global financial shocks. More precisely, diversification was associated with smaller exchange rate depreciation during the quantitative easing taper tantrum of 2013. These results point to a possible benefit from strengthening regional financial integration. Deeper regional integration would reduce dependence on global financial markets for funding and hence vulnerability to global shocks.

Keywords: East Asia, exchange rate depreciation, financial integration, financial stability, global integration, QE tapering, regional integration

JEL Classification: F32, F44, G01

Suggested Citation

Park, Donghyun and Shin, Kwanho, Financial Integration in Asset and Liability Holdings in East Asia (August 2015). Asian Development Bank Economics Working Paper Series No. 444, Available at SSRN: https://ssrn.com/abstract=2707530 or http://dx.doi.org/10.2139/ssrn.2707530

Donghyun Park (Contact Author)

Asian Development Bank - Economic Research ( email )

6 ADB Avenue, Mandaluyong City 1550
Metro Manila
Philippines

Kwanho Shin

Korea University ( email )

1 Anam-dong 5 ka
Sunbuk-Ku, Department of Economics
Seoul 136-701
Korea
82-2-3290-2220 (Phone)
82-2-3290-2719 (Fax)

HOME PAGE: econ.korea.ac.kr/~khshin

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