Financial integration and asset returns

Martin, Philippe and Rey, Helene (2000) Financial integration and asset returns. CEPDP (451). London School of Economics and Political Science. Centre for Economic Performance, London, UK. ISBN 0753013665

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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.

Item Type:	Monograph (Discussion Paper)
Official URL:	http://cep.lse.ac.uk
Additional Information:	© 2000 the authors
Divisions:	Centre for Economic Performance
Subjects:	H Social Sciences > HG Finance
Date Deposited:	30 Jul 2008 16:13
Last Modified:	15 Sep 2024 16:24
URI:	http://eprints.lse.ac.uk/id/eprint/20201

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