Risk Sharing and Financial Contagion in Asia : An Asset Price Perspective

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Risk Sharing and Financial Contagion in Asia : An Asset Price Perspective
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Volume/Issue:
2011/242
Series:
IMF Working Papers
Author(s):
Phurichai Rungcharoenkitkul
Publisher:
INTERNATIONAL MONETARY FUND
Published Date:
October 2011
DOI:
http://dx.doi.org/10.5089/9781463922634.001
ISBN:
9781463922634
ISSN:
1018-5941
Page:
41
This paper assesses financial integration in Asia in terms of risk-sharing benefit versus financial-contagion cost. We construct a new measure of risk sharing based on a term structure model, which allows identification of realized stochastic discount factors. Risk sharing is low in Asia, and varies across time and countries, whereas contagion risks are more significant intra-regionally, and relatively stable over the past decade. An overall tradeoff exists between risk sharing and contagion, but the terms of tradeoffs vary across countries, depending on relative economic fluctuations and inflation differentials. Asia, therefore, can potentially enhance risk sharing without raising contagion risk.
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