Working Paper: NBER ID: w12408
Authors: Barry Eichengreen; Pipat Luengnaruemitchai
Abstract: We use data on the extent to which residents of one country hold the bonds of issuers resident in another as a measure of financial integration or interrelatedness, asking how Asia compares with Europe and Latin America and with the base case in which the purchaser and issuer of the bonds reside in different regions. Not surprisingly, we find that Europe is head and shoulders above other regions in terms of financial integration. More interesting is that Asia already seems to have made some progress on this front compared to Latin America and other parts of the world. The contrast with Latin America is largely explained by stronger creditor and investor rights, more expeditious and less costly contract enforcement, and greater transparency that lead to larger and better developed financial systems in Asia, something that is conducive to foreign participation in local markets and to intra-regional cross holdings of Asian bonds generally. Further results based on a limited sample suggest that one factor holding back investment in foreign bonds in East Asia may be limited geographical diversification by mutual funds, in turn reflecting a dearth of appropriate assets. Asian Bond Fund 2, by creating a passively managed portfolio of local currency bonds potentially attractive to mutual fund managers and investors, may help to relax this constraint.
Keywords: No keywords provided
JEL Codes: F0; F3
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Europe (N93) | higher financial integration in bond markets (F30) |
| stronger creditor and investor rights (G38) | higher financial integration in bond markets in Europe (G15) |
| better contract enforcement (D86) | higher financial integration in bond markets in Europe (G15) |
| greater transparency (G38) | higher financial integration in bond markets in Europe (G15) |
| Asia (N95) | progress in financial integration compared to Latin America (N26) |
| larger and more robust financial systems in Asia (N25) | progress in financial integration compared to Latin America (N26) |
| limited geographical diversification by mutual funds in East Asia (G23) | hinder investment in foreign bonds (F21) |
| financial conditions in the investing country (F34) | influence bond market transactions (G10) |
| external factors (O36) | disruptions in accessing foreign finance for emerging economies (F65) |