Financial Integration and Asset Returns

Philippe Martin and Helene Rey

No 2282, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: The paper investigates the impact of financial integration on asset return, risk diversification and breadth of financial markets. We analyse a three-country macroeconomic model in which i) the number of financial assets is endogenous; ii) assets are imperfect substitutes; iii) cross-border asset trade entails some transaction costs; iv) the investment technology is indivisible. In such an environment, lower transaction costs between two financial markets translate into higher demand for assets issued on those markets, higher asset price and larger diversification. For the country left outside the integrated area, the welfare impact is ambiguous: it enjoys better risk diversification but faces an adverse movement in its financial terms of trade. When we endogenise financial market location, we find that financial integration benefits the largest economy of the integrated area. Only when transaction costs become very small does financial integration lead to relocation of markets in the smallest economy.

Keywords: Asset Trade; Cross-Listing; Financial Integration; Transaction Costs (search for similar items in EconPapers)
JEL-codes: F12 F4 G1 G12 (search for similar items in EconPapers)
Date: 1999-11
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Citations: View citations in EconPapers (6)

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Related works:
Journal Article: Financial integration and asset returns (2000)
Working Paper: Financial Integration and Asset Returns (2000)
Working Paper: Financial integration and asset returns (2000)
Working Paper: Financial Integration and Asset Returns (2000)
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