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| Author: | Martin, P. Rey, H. |
| Title: | Financial integration and asset returns |
| Journal: | European Economic Review
2000 : JUN, VOL. 44:7, p. 1327-1350 |
| Index terms: | Assets Trade Transaction costs Models |
| Freeterms: | Financial integration |
| Language: | eng |
| Abstract: | This paper investigates the impact of financial integration on asset return, risk diversification and breadth of financial markets. A 3-country macroeconomic model is analyzed 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 btw. 2 financial markets translate into 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 financial market location endogenized, it is found that financial integration benefits the largest economy of the integrated area. |
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