J. K. Dietrich – Asia-Link Program -- Research Conference on Safety and Efficiency of Financial System -- August 2007 Financial Integration, Portfolio Selection, and Investment J. Kimball Dietrich University of Southern California Session 2 – August 27, 2007

J. K. Dietrich – Asia-Link Program -- Research Conference on Safety and Efficiency of Financial System -- August 2007 Session 2 -- Overview and Themes u Borja-Goyeau (BG), “International Liquidity, Monetary Spillovers, and Asset Prices” u Dupont-Goyeau-Sarte (DGS), “World Business Cycle, Local Specialization and Asset Prices” u Bautista-Maveyraud-Tricoire (BM), “Saving Investment, Financial Crisis, and Structural Changes in East Asian Economies” u Bautista-Goyeau-Yu (BGY), “Regime Switching Market Risk: Evidence from the Philippines”

J. K. Dietrich – Asia-Link Program -- Research Conference on Safety and Efficiency of Financial System -- August 2007 Overview u All four papers are empirical u They are all sophisticated analyses and provide a thorough economic literature context u The first three analyze regions or countries in relation to other regions or countries, looking for global effects on Asian economies

J. K. Dietrich – Asia-Link Program -- Research Conference on Safety and Efficiency of Financial System -- August 2007 Overview: Comparison

J. K. Dietrich – Asia-Link Program -- Research Conference on Safety and Efficiency of Financial System -- August 2007 Themes u All four papers repeat prior analysis to the Asian contect u Original work substantial –BG => Baks-Kramer (1999) IMF WP –DPG => Harding-Pagan (2002, 2006) –BM=> Feldstein-Harioka (1980) + Hamilton (1989) –BGY=> CAPM + Hamilton (1989)

J. K. Dietrich – Asia-Link Program -- Research Conference on Safety and Efficiency of Financial System -- August 2007 Themes u What do we learn? –In the three macroeconomic analyses, there are econometrically detectable feedbacks from region to region, or relations between cycles in different countries, or departures from savings- investment in single economies u Risk assessments change u Connection to portfolio choice and relation of capital flows to cycles, etc., are not clear

J. K. Dietrich – Asia-Link Program -- Research Conference on Safety and Efficiency of Financial System -- August 2007 Suggested Implications u Small countries are embedded in a larger world, for example no studies include China or Japan u Short data series on quarterly data or relatively small number of observations on annual data do not allow high resolution of results for emerging- market studies u A rich arena for significant measures of financial market integration is to be found in high- frequency data from financial markets

J. K. Dietrich – Asia-Link Program -- Research Conference on Safety and Efficiency of Financial System -- August 2007 Context for Analysis u Recent “sub-prime” mortgage crisis illustrates the fundamental truth that markets are integrated u Crises are the usual focus of policy-relevant research and analysis u Both current crisis and those of the 1990’s illustrate the importance of sectoral imbalances (i.e. the balance-sheet approach)