International Capital Flows in a World of Greater Financial Integration
Viktoria Hnatkovska () and
Martin Evans ()
No 419, Computing in Economics and Finance 2005 from Society for Computational Economics
International capital flows have increased dramatically since the 1980s, with much of the increase being due to trade in equity and debt markets. Such developments are often attributed to the increased integration of world financial markets. We present a model that allows us to examine how greater integration in world financial markets affects the structure of asset ownership and the behavior of international capital flows. Our model predicts that international capital flows are large (in absolute value) and very volatile during the early stages of financial integration when international asset trading is concentrated in bonds. As integration progresses and households gain access to world equity markets, the size and volatility of international bond flows fall dramatically but continue to exceed the size and volatility of international equity flows. We also find that variations in the equity risk premia account for almost all of the international portfolio flows in bonds and equities. We argue that both effects arise naturally as a result of increased risk sharing facilitated by greater financial integration. The paper also makes a methodological contribution to the literature on dynamic general equilibrium asset-pricing. We present a new technique for solving a dynamic general equilibrium model with production, portfolio choice and incomplete markets
Keywords: Portfolio Choice; Financial Integration; Incomplete Markets (search for similar items in EconPapers)
JEL-codes: D52 F36 G11 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-bec, nep-dge, nep-fin and nep-fmk
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Persistent link: https://EconPapers.repec.org/RePEc:sce:scecf5:419
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