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Bond Markets as Conduits for Capital Flows: How Does Asia Compare?

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  • 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.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 12408.

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Date of creation: Aug 2006
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Publication status: published as Bond Markets as Conduits for Capital Flows: How Does Asia Compare? , Barry Eichengreen, Pipat Luengnaruemitchai. in International Financial Issues in the Pacific Rim: Global Imbalances, Financial Liberalization, and Exchange Rate Policy (NBER-EASE Volume 17) , Ito and Rose. 2008
Handle: RePEc:nbr:nberwo:12408

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Cited by:
  1. Maurice Obstfeld, 2009. "International Finance and Growth in Developing Countries: What Have We Learned?," NBER Working Papers 14691, National Bureau of Economic Research, Inc.
  2. Hiroshi Fujiki & Akiko Terada-Hagiwara, 2007. "Financial integration in East Asia," Working Paper Series, Federal Reserve Bank of San Francisco 2007-30, Federal Reserve Bank of San Francisco.
  3. Abid, Fathi & Bahloul, Slah, 2011. "Selected MENA countries' attractiveness to G7 investors," Economic Modelling, Elsevier, Elsevier, vol. 28(5), pages 2197-2207, September.
  4. Jamel Boukhatem, 2009. "Essai sur les déterminants empiriques de développement des marchés obligataires," EconomiX Working Papers 2009-32, University of Paris West - Nanterre la Défense, EconomiX.
  5. Woosik Moon, 2011. "Whither East Asian economic integration? Korea’s regionalization cum globalization strategy," Asia Europe Journal, Springer, Springer, vol. 9(1), pages 29-42, November.
  6. Sabine Herrmann & Adalbert Winkler, 2008. "Real convergence, financial markets, and the current account – Emerging Europe versus emerging Asia," Occasional Paper Series 88, European Central Bank.
  7. Vo, Xuan Vinh, 2009. "International financial integration in Asian bond markets," Research in International Business and Finance, Elsevier, Elsevier, vol. 23(1), pages 90-106, January.
  8. Yohei Okawa & Eric van Wincoop, 2010. "Gravity in International Finance," Working Papers, Hong Kong Institute for Monetary Research 072010, Hong Kong Institute for Monetary Research.

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