Financial integration and asset returns

Philippe Martin and Helene Rey

LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library

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 to higher demand for assets issued on those markets, higher asset price and greater 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: Financial integration; asset trade; transaction costs; cross-listing (search for similar items in EconPapers)
JEL-codes: F3 G3 (search for similar items in EconPapers)
Pages: 25 pages
Date: 2000-02
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (71)

Downloads: (external link)
http://eprints.lse.ac.uk/20201/ Open access version. (application/pdf)

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 (1999)
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Persistent link: https://EconPapers.repec.org/RePEc:ehl:lserod:20201

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