International Financial Integration*



-9-

III. Analysis of International Investment Positions

This section discusses theoretical determinants of international financial integration, and
conducts a simple econometric analysis aiming at identifying the key factors driving
international asset trade.

A. Conceptual Issues

A natural benchmark in thinking about the level of international asset cross-holdings is the
allocation that would hold under complete global financial market integration with no
cross-border transactions costs. In such a world, each country would hold a very high level
of foreign assets and liabilities, in line with full diversification. As a crude approximation,
a country representing 1 percent of the world endowment would hold 99 percent of its
wealth overseas and, in turn, 99 percent of its domestic tradable assets would be held by
foreigners.5

Although the world is still far from this idealized state, it is logical to relate the cross-
country and time series variation in international portfolios to the corresponding dispersion
in the (implicit and explicit) barriers to full integration and in the gains to international
diversification. The level of international asset trade will also depend on the ‘tradability’
of domestic assets: factors that reduce domestic transaction costs also facilitate cross-
border asset trade.

Martin and Rey (2000, 2001) provide theoretical models that address some of these issues.
In their framework, investors are risk averse, the number of financial assets is endogenous,

5 See Obstfeld and Rogoff (1996, Chapter 5) for a textbook review of the theory of
international financial trade.



More intriguing information

1. Existentialism: a Philosophy of Hope or Despair?
2. The Social Context as a Determinant of Teacher Motivational Strategies in Physical Education
3. The name is absent
4. Labour Market Institutions and the Personal Distribution of Income in the OECD
5. On the Integration of Digital Technologies into Mathematics Classrooms
6. Gender and aquaculture: sharing the benefits equitably
7. The name is absent
8. Short report "About a rare cause of primary hyperparathyroidism"
9. Federal Tax-Transfer Policy and Intergovernmental Pre-Commitment
10. Om Økonomi, matematik og videnskabelighed - et bud på provokation
11. Cancer-related electronic support groups as navigation-aids: Overcoming geographic barriers
12. Review of “From Political Economy to Economics: Method, the Social and Historical Evolution of Economic Theory”
13. The name is absent
14. Strategic Effects and Incentives in Multi-issue Bargaining Games
15. Markets for Influence
16. The name is absent
17. The name is absent
18. Kharaj and land proprietary right in the sixteenth century: An example of law and economics
19. Financial Markets and International Risk Sharing
20. The name is absent