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Prepared by Yiqun Wu (APD) and Xiaohui Wu (IMF summer intern).
The Plus Three economies are China, Japan, and Korea.
Using bank flows in the regressions for robustness check does not alter the conclusions.
The trade intensity score is calculated as a country’s share in global trade as a proportion of its GDP share. Portfolio investment intensity is defined in a similar way. The intensity score formula is:
Alternative financial integration measures such as banking positions are used as robustness checks.
For more details and results, see Wu and Wu (2018). Institutional quality is found to be a key factor affecting trade in financial assets. Ananchotikul, Piao, and Zoli (2015) find that the lack of regulatory harmonization has a more negative effect on intra-Asia investment.
The results are robust when banking position is used as the measure for financial integration.
This index, taken from the World Bank’s Worldwide Governance Indicators database, reflects a country’s progress in enhancing law and enforcement and building a trustworthy society. Results are similar when other institutional- quality indicators are used. The results also hold when lagged rule-of-law index and instrumental variable (latitude, fractionalization of language and religion) are used to account for the possible endogeneity of institutional quality.
The results are robust when the region is restricted to ASEAN (although less significant) or ASEAN-5, and robust with or without Singapore.
Adrian, Etula, and Muir (2011) propose U.S. security broker-dealer sector leverage (assets-to-equity) as a better liquidity measure because it is market oriented and reflects timely underlying market conditions. Bruno and Shin (2013) use this leverage as their preferred global liquidity indicator. Our results using the Chicago Board Options Exchange Volatility Index are similar although less significant, whereas using US and EU credit-to-GDP growth as liquidity indicators also yields similar results.
Portfolio investment from ASEAN-5 economies also exhibits less volatility than that from global investors.
Financial markets are, in essence, the arrangements for processing information in networks of savers and investors (Gochoco-Bautista and Remolona 2012).
Our findings that regional investors are less likely to pull out of their investments in the face of a crisis also suggest that regional financial integration is a suitable vehicle for promoting much needed long-term investment, such as in infrastructure. Indeed, through mobilizing savings and lowering financing costs, regional financial integration has been explored as a regional approach for financing infrastructure and other development needs.
The ordinary least squares regression includes standard factors affecting the current account, such as the dependency ratio and fiscal balance, and global (regional) financial integration index (z-score). We include year and country fixed effects and use robust standard errors.
Global (regional) financial integration in Table 5 refers to the global (regional) financial integration index (z-score) calculated from portfolio investment data. Using z-scores calculated from FDI data has similar results.
Singapore is not included in this exercise; the results are less significant with Singapore, perhaps because of Singapore’s status as a financial center and its higher stage of development.