IMF Working Papers

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

Author/Editor:

Phurichai Rungcharoenkitkul

Publication Date:

October 1, 2011

Electronic Access:

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Summary:

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.

Series:

Working Paper No. 2011/242

Subject:

Asset prices Financial contagion Financial integration Financial markets Financial sector development Financial sector policy and analysis Prices Stock markets