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Bond Markets As Conduits for Capital Flows; How Does Asia Compare?

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  • Pipat Luengnaruemitchai
  • Barry J. Eichengreen

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 more financially integrated than other regions. Asia, more interestingly, already seems to have made more progress on this front than Latin America and other parts of the world. The contrast with Latin America is largely explained by stronger creditor and investor rights, better contract enforcement, and greater transparency, all of which are conducive to foreign participation in local markets and to intraregional 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.

Suggested Citation

  • Pipat Luengnaruemitchai & Barry J. Eichengreen, 2006. "Bond Markets As Conduits for Capital Flows; How Does Asia Compare?," IMF Working Papers 06/238, International Monetary Fund.
  • Handle: RePEc:imf:imfwpa:06/238
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    Cited by:

    1. Ramgopal Agarwala, 2008. "Towards An Asian “Bretton Woods†for Restructuring of the Regional Financial Architecture," Finance Working Papers 22079, East Asian Bureau of Economic Research.
    2. Choi Sang Rim & Park Daekeun & Tschoegl Adrian E., 2016. "Banks and the World’s Major Banking Centers, 2010," Global Economy Journal, De Gruyter, vol. 16(2), pages 275-291, June.
    3. Maurice Obstfeld, 2009. "International Finance and Growth in Developing Countries: What Have We Learned?," NBER Working Papers 14691, National Bureau of Economic Research, Inc.
    4. Jamel Boukhatem, 2009. "Essai sur les déterminants empiriques de développement des marchés obligataires," EconomiX Working Papers 2009-32, University of Paris Nanterre, EconomiX.
    5. Vo, Xuan Vinh, 2009. "International financial integration in Asian bond markets," Research in International Business and Finance, Elsevier, vol. 23(1), pages 90-106, January.
    6. Chiţu, Livia & Eichengreen, Barry & Mehl, Arnaud, 2014. "History, gravity and international finance," Journal of International Money and Finance, Elsevier, vol. 46(C), pages 104-129.
    7. Rudiger Ahrend & Antoine Goujard, 2012. "International Capital Mobility and Financial Fragility - Part 3. How Do Structural Policies Affect Financial Crisis Risk?: Evidence from Past Crises Across OECD and Emerging Economies," OECD Economics Department Working Papers 966, OECD Publishing.
    8. Luc Laeven, 2014. "The Development of Local Capital Markets; Rationale and Challenges," IMF Working Papers 14/234, International Monetary Fund.
    9. Hiroshi Fujiki & Akiko Terada-Hagiwara, 2007. "Financial Integration in East Asia," Monetary and Economic Studies, Institute for Monetary and Economic Studies, Bank of Japan, vol. 25(S1), pages 57-100, December.
    10. Fathi Abid & Slah Bahloul, 2010. "Selected MENA Countries’ Attractiveness to G7 Investors," Working Papers 531, Economic Research Forum, revised 07 Jan 2010.
    11. Herrmann, Sabine & Winkler, Adalbert, 2009. "Real convergence, financial markets, and the current account - Emerging Europe versus emerging Asia," The North American Journal of Economics and Finance, Elsevier, vol. 20(2), pages 100-123, August.
    12. Fabian J. Baier & Paul J.J. Welfens, 2018. "The UK’s Banking FDI Flows and Total British FDI: A Dynamic BREXIT Analysis," EIIW Discussion paper disbei254, Universitätsbibliothek Wuppertal, University Library.
    13. Okawa, Yohei & van Wincoop, Eric, 2012. "Gravity in International Finance," Journal of International Economics, Elsevier, vol. 87(2), pages 205-215.
    14. Emma Galli & Ilde Rizzo & Carla Scaglioni, 2018. "Is transparency spatially determined? An empirical test for the Italian Municipalities," Working Papers 6/18, Sapienza University of Rome, DISS.
    15. Woosik Moon, 2011. "Whither East Asian economic integration? Korea’s regionalization cum globalization strategy," Asia Europe Journal, Springer, vol. 9(1), pages 29-42, November.
    16. Rudiger Ahrend & Antoine Goujard, 2012. "International Capital Mobility and Financial Fragility - Part 1. Drivers of Systemic Banking Crises: The Role of Bank-Balance-Sheet Contagion and Financial Account Structure," OECD Economics Department Working Papers 902, OECD Publishing.
    17. Valentina Gullo & Pierluigi Montalbano, 2018. "Where does ìdirtyî money go? A gravity analysis," Working Papers 5/18, Sapienza University of Rome, DISS.
    18. Abid, Fathi & Bahloul, Slah, 2011. "Selected MENA countries' attractiveness to G7 investors," Economic Modelling, Elsevier, vol. 28(5), pages 2197-2207, September.
    19. repec:kap:iecepo:v:16:y:2019:i:1:d:10.1007_s10368-018-00426-x is not listed on IDEAS

    More about this item

    Keywords

    Asia; Bond markets; Capital flows; Economic models; Foreign investment; cross-border investment; gravity model; bond; bonds; bond transactions; bond returns; Financial Aspects of Economic Integration;

    JEL classification:

    • F0 - International Economics - - General
    • F3 - International Economics - - International Finance

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