Abstract: This chapter assesses the progress of regional and global financial integration in East Asia. The chapter is organized as follows. Section 7.2 analyzes the data on geographical distribution of international portfolio assets and bank claims for East Asia compared to that for Europe, in order to judge the degree of regional and global asset diversification of East Asia. A gravity model of bilateral financial asset holdings is adopted to formally test if East Asian financial markets are relatively less integrated within the region than in global markets, particularly compared with ones in Europe. Section 7.3 introduces the empirical framework on consumption risk-sharing, and estimates the degree of regional and global consumption risk-sharing for East Asia and Europe. Section 7.4 discusses several hypotheses for the low degree of regional financial integration in East Asia.

Keywords: financial integration, international portfolio assets, bank claims, gravity model, risk-sharing,