Asian Capital Market Development And Integration: Challenges and Opportunities

The fiscal crisis in Europe continues to cast a shadow on the global economic outlook, and the securities issued by the United States and European nations are losing their status as traditional safe assets and reserve value. As a result, investors and governments are looking to diversify their investment portfolio with emerging markets, particularly Asian bonds. Such renewed interest has led to excessive capital inflows, making the region increasingly vulnerable to external shocks. However, on the other hand, it leads to abundant liquidity in the capital markets, which reduces financing costs and expands investment opportunities. This book analyses this dilemma and proposes that development of local bond markets and achieving greater market depth and interconnectedness is the best bet to prevent the reoccurrence of a currency crisis like 1997. It thus, assesses the progress achieved thus far in capital market integration in Asia, and compares it with its global peers. The study also assesses the degree to which volatility in equity and bond market returns, driven by financial turmoil originating at both the regional and global levels, spills over into emerging Asia domestic equity and bond markets. The results of this analysis indicate that such spill-over significantly impacts both domestic equity and bond markets in the region. This finding suggests that on-going regional capital market integration initiatives should take into account the risk of contagion that regional financial integration presents, and introduce measures for mitigating such risk as a means of ensuring financial stability in the region. Contributors to this volume - Iwan Azis is the head of the Office of Regional Integration (OREI) at the Asian Development Bank (ADB); In Seok Baek is a research fellow at the Korea Capital Market Institute (KCMI); Ki Beom Binh is a professor at Myongi University; Joseph Gagnon is a senior fellow at Peterson Institute for International Economics (PIIE); Kihoon Hong is a research fellow at KCMI; Suk Hyun is a research fellow at KCMI; Shigehito Inukai is a professor at the Faculty of Law at Waseda University; Olivier Jeanne is a a senior fellow at PIIE; Jangkoo Kang is a professor at the Korea Advanced Institute of Science and Technology; Pil-Kyu Kim is a senior research fellow at KCMI; Doowon Lee is a lecturer at The University of Newcastle in Australia; Inhyung Lee is a senior research fellow and research director at KCMI; Seungho Lee is a research fellow at KCMI; Mitzirose Legal is an economics officer at ADB's OREI; Michael Liu is with the Institute of Global Finance, Australian School of Business, University of New South Wales, Sydney, Australia; Sabyasachi Mitra is a principal economist at ADB's South Asia Department; Fariborz Moshirian is a professor of finance and director of the Institute; of Global Finance, Australian School of Business, University of New South Wales, Sydney, Australia; Thiam Hee Ng is a senior economist at ADB's OREI; Marcus Noland is senior fellow and director of studies at PIIE; Cyn-Young Park is an assistant chief economist at ADB; Yong-Rin Park is a research fellow at KCMI; Ilhyock Shim is a senior economist at the BIS Representative Office for Asia and the Pacific; Ramesh Subramaniam is the deputy director general at ADB's Southeast Asia Department; Arvind Subramanian is the Dennis Weatherstone senior fellow at PIIE; Nicolas Veron is a visiting fellow at PIIE and a senior fellow at Bruegel (Brussels); John Williamson is a senior fellow (retired) at PIIE.