A dark side of international capital market integration: Domestic investors' view

In Joon Kim, So Jung Kim and Sun-Joong Yoon

International Review of Economics & Finance, 2014, vol. 33, issue C, 238-256

Abstract: We explore the impact of capital market integration on the welfare of domestic investors, in particular, with closed-form solutions to optimal asset holdings and utility changes in a simple equilibrium framework wherein agents have mean–variance utility. Our model allows us to show the welfare loss of domestic investors with inefficient portfolios from market integration. The results indicate that only efficient portfolio holdings before integration can guarantee the welfare enhancement of all domestic investors, in contrast to the extant literature, which emphasizes the beneficial effects of market integration. In addition, we decompose the welfare changes of domestic investors into two components, i.e., the correlation effect and the quantity–volatility effect, to enhance our understanding of economic implications.

Keywords: Capital market integration; Welfare loss; Correlation effect; Quantity–volatility effect (search for similar items in EconPapers)
JEL-codes: G11 G12 (search for similar items in EconPapers)
Date: 2014
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Citations: View citations in EconPapers (3)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:reveco:v:33:y:2014:i:c:p:238-256

DOI: 10.1016/j.iref.2014.05.007

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