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

Abstract

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.

Regional Economic Outlook, April 2012: Asia and Pacific: Managing Spillovers and Advancing Economic Rebalancing

“…Cross-section regression analysis, shown in Table 2.1, suggests that bilateral trade, FDI, and banking exposures to systemic economies help explain the diversity of financial betas _______ 5 Movements in financial betas over the business cycle are not necessarily disruptive, as they may reflect international risk sharing through financial markets. Rungcharoenkitkul (2011) evaluates the tradeoffs between the benefits (risk sharing) and the costs (negative spillovers) of financial integration. 6 The upward trend in betas existed even before the onset of the Lehman crisis in 2008, at least for East Asia excluding China and ASEAN.…”

International Risk Sharing in the EMU

“…This is an indicator of bilateral risk sharing, which relies on the similarity of pricing kernels. The BCS index is computed for example by Rungcharoenkitkul (2011) to assess risk sharing among some Asian countries in the first decade of the 2000s.…”

Contagion and self-learning in Asian economic crises 1997-1998 and 2008-2010. Case Study of Malaysia / Problem zarażania i uczenia się w kryzysach azjatyckich 1997-1998 i 2008-2010. Studium przypadku Malezji

“…After the collapse of Lehman Brothers on September 15, 2008 some authors also discussed the contagion effect phenomenon [Dungy et al 2010;Geert et al 2011;Forbes 2012;Markwat et al 2009;Rose, Spiegel 2009]. The numerous analyses take up the subject of the contagion effect propagation in Asia both for 1997-1998 and 2008-2010 crisis [Kawai 2008;Takatoshi, Hashimoto 2005;Wilson, Zurbruegg 2004;Rungcharoenkitkul 2011;Shin 2013].…”