Financial Integration in East Asia: An Empirical Investigation


  • Earlier versions of this paper were presented at various conferences and seminars. We are grateful to Pierfederico Asdrubali, Yung Chul Park, Innwon Park, Robert Scollay, Daekeun Park and other participants for their helpful comments. We also thank Joshua Aizenman, Fukunari Kimura and Zhihong Yu, the associate editor of this Journal, for their valuable comments and suggestions.


The central objective of this paper is to empirically evaluate the degree of linkages among East Asian equity and bond markets. Using data from the IMF’s Coordinated Portfolio Investment Survey (CPIS), we find that intra-East Asian financial asset holdings of four East Asian countries – Japan, Korea, Hong Kong and Singapore – are larger than the levels predicted by the financial gravity model. However, our analysis suggests that this result is likely to be driven by intra-regional trade linkages and reflect those linkages. Therefore, the salient implication for regional policymakers is that they should continue to promote intra-regional financial integration. This paper also aims to analyse the impact of three different types of country-specific risks – political, economic and financial risks – on investment from the four countries. This analysis yields a clear positive relationship between destination-country risk, in particular political risk, and capital inflows.