Regional and Global Financial Integration in East Asia

We examine the degree of regional vs. global financial integration of East Asian countries in three ways; (1) comparing the size of cross-border assets such as securities and bank claims, (2) estimating the gravity model of bilateral financial asset holdings, and (3) estimating consumption risk sharing model. The results suggest that East Asian financial markets, particularly compared to the European ones, are relatively less integrated with each other than to global markets. We also find relatively more evidence of regional financial integration in bank claim markets than portfolio asset markets. The low financial integration within East Asia is attributed to the low incentives for portfolio diversification within the region, the low degree of development and deregulation of financial markets, and the instability in monetary and exchange rate regime.