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Financial Integration in East Asia: Evidence from Stock Prices(Working Paper No.403)

Economic Research Institute (82-2-759-5429) 2009.10.26 1070
This paper investigates the extent of global and regional integration in East Asia
using stock price index as a measure of economic performance. We employ a
structural VAR model to separate the underlying shocks into “global”, “regional” and
“country-specific” shocks. The estimation results show that country-specific shocks
still play a dominant role in East Asia although their role appears to have declined
over time, especially after the 1997 financial crisis. Global and regional shocks are
responsible for small but increasing shares of stock price fluctuations in most
countries. The results indicate that, despite years of liberalization and regional
integration, economics in East Asia remain dissimilar and are subject to asymmetric
shocks in comparison to European countries. This suggests that it might be costly to
abandon monetary policy independence and that a more flexible exchange rate regime
might be desirable.

I. Introduction

II. Economic Integration in East Asia
1. Trade Integration in East Asia
2. Financial integration in East Asia - the Chiang Mai Initiative
3. Financial integration in East Asia - Asian Bond Market Initiative
4. Stock Markets in East Asia

III. Data and Methodology

IV. Empirical Results

V. Robustness

VI. Conclusion