IMF paper identifies risk-sharing, contagion trade-off in Asia

An International Monetary Fund paper published on Thursday finds evidence of a trade-off between risk-sharing and contagion in Asia.

Phurichai Rungcharoenkitkul, the paper's author, construct a new measure of risk sharing based on a term structure mode to compare the benefits of financial integration in Asia in terms of risk sharing against the financial contagion costs. The author notes that 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.

The finds evidence of a trade-off between risk sharing and contagion, but says the terms of trade-offs vary between countries, depending on relative economic fluctuations and inflation differentials. However, the average trade-off is hardly a good representative of individual Asian economies, and there is a large difference in the terms of trade-offs across countries, the author says. The findings underline the need for Asian economies to enhance the quality of financial integration within the region.

Click here to read the paper.