Assessing the Integration of Asia's Equity and Bond Markets

Abstract

Since the Asian financial crisis in 1997-1998, economies in the region have made efforts to diversify their reliance on the banking sector in favour of other financial intermediaries such as equities and bonds. Despite the recent development, the degree of intra-regional financial integration appears to lag behind the increase in trade. Such asymmetric development in economic and financial integration may have implications on financial stability. Therefore, it is of interest to monitor the development and progress of financial market integration in the region. Unlike most studies which focus on either the equity market or the bond market integration, this study compares the different experiences of integration of the equity and the government bond markets in the region. To do so, we construct various indicators for measuring different dimensions of equity and bond market integration. A combined use of these indicators would give policy makers a more balanced picture regarding the general trend of equity and bond market integration in the region. Furthermore, the examination of the co-movement between equity and bond returns at the economy and the regional levels may also shed light on the degree of integration in these markets.

Keywords: Financial integration, Kalman filter, Cointegration, Dynamic correlation

JEL Classification: C13, C22, F36, G15