• F30;
  • F36;
  • G15;
  • F41

Park and Lee (2011) provide us with a superb empirical study which demonstrates the increasing degree of financial openness and integration of emerging Asia, namely, emerging Asia's equity markets are integrated more globally than locally, while local currency bond markets remain largely segmented from the overseas markets. Their findings are broadly consistent with Jang (2011) who pointed to tighter interregional linkages of equity markets together with the region's slower financial integration compared to its trade integration.

The price-based empirical exercise is neat. Notably, the measurement of global and regional spillover intensity in emerging Asian equity/bond markets is very interesting (Park & Lee, 2011; figures 8 and 10). Further, the decomposition of the variance of local equity/bond returns into global and regional shocks is illuminating (Park & Lee, 2001; figures 9 and 11).

But I found that the contribution of a purely local shock both to the equity and bond markets is too minimal. In particular, a purely local shock to bond markets must dominate the regional and global shocks.

Further, I am concerned about the role of expected exchange rate changes in cross-border equity/bond investments. The difference in exchange rate regimes coupled with capital controls may affect the results obtained regarding the differentiated degree of integration between equities and bonds. I wonder if the expected component of the returns on equity/bond can be well-captured by relating the individual market returns to a constant term and to returns in the previous period with the unexpected component being derived as an error term.

The quantity-based data relating to cross-border equity and bond investments confirm the dominance of global integration of equity markets and the segmentation of bond markets. According to the International Monetary Fund's Coordinated Portfolio Investment Survey, equity investments from the USA to East Asia including Japan amounted to $882 billion at the end of 2009, while East Asia invested $298 billion in the US equity market. On the other hand, bond investments from East Asia to the USA amounted to $789 billion, while the intraregional bond investments were limited to $108 billion. Bond investments from the USA to East Asia were much less than intraregional investments ($59 billion).

This fact seems to be consistent with the hypothesis of a “high-quality asset supply” by the USA (Caballero et al., 2006). Dooley et al. (2004) argued that the “Bretton Woods II regime” is presumed to be sustained by the implicit total return swap arrangement between the USA and East Asia with the collateral of the current account deficit on the side of the USA. My concern is about the consequences for global imbalances if cross-border bond investments in East Asia grow rapidly.

Park and Lee's paper mention several factors which cause different degrees of financial integration between equity and bond markets: (i) the bank-based financial system, (ii) the underdeveloped financial infrastructure and legal framework for debt securities, (iii) the subpar standards of auditing and accounting system, and (iv) the lower transparency and weak governance of corporate firms.

First, I would like to emphasize the role of foreign direct investment in explaining the differentiated degree of financial integration between equity and local currency bond markets. The literature on the “home bias” of international portfolio investments tells us that the degree of information asymmetry is more marked in the case of equity investments than government bond investments. In contrast to Japan, the development process in East Asia has been closely associated with a rapid increase in foreign direct investment. The presence of multinational firms may have diminished the degree of information asymmetry among global investors, thus leading to the higher degree of integration of equity markets.

Second, I would like to stress the lack of infrastructure relating to payment and securities systems in East Asia which may seriously hinder cross-border bond investments, as compared with the developments in the emerging European economies. East Asian countries do not have common and efficient infrastructure for the payment/settlement system, although there have been proposals to establish the “Regional Settlement Intermediary” or the linkage through the “Asian International Central Securities Depositories.”

As an exception, Hong Kong has developed a multicurrency settlement system which facilitates not only the payment versus payment in four currencies settlements, but also the delivery versus payment in security settlements through the linkage between the Central Money-Market Unit and Euro-Clear or Euro-Stream.


  1. Top of page
  2. References
  • Caballero R.J., Fahri E. & Gourinchas P.O. (2006). An equilibrium model of “global imbalances” and low interest rates. NBER Working Paper no. 11996. Cambridge: National Bureau of Economic Research.
  • Dooley M.P., Folkerts-Landau D. & Garber M. (2004). The US current account deficit and economic development: Collateral for a total return swap. NBER Working Paper no. 10727. Cambridge: National Bureau of Economic Research.
  • Jang H.B. (2011). Financial integration and cooperation in East Asia: Assessment of recent developments and their implications. Institute for Monetary and Economic Studies Discussion Paper No. 2011-E-5. Tokyo: Bank of Japan.
  • Park C.Y. & Lee J.W. (2011). Financial integration in emerging Asia: Challenges and prospects. Asia Economic Policy Review, 6 (2), 176198.