International Financial Integration*

-16-
median value rising from 0.16 in 1982-85 to 0.36 in 1998-2001. Column (1) shows that
EXTLIB has some limited explanatory power in explaining GEQGDP, but its individual
significance is lost in columns (2)-(7). As in Table 2, TRADE is always highly significant:
moving from column (1) to column (2) also increases explanatory power from 0.12 to
0.31. The average point estimate for TRADE is now 1.8, about ½ of its size in Table 2.
Again, higher output per capita is significantly associated with an increase in external
equities cross-holdings across columns (3)-(7).

Explanatory power sharply rises to 0.89 in column (4) once domestic financial market
variables are included. STKCAP continues to exert a very strong positive influence: a 10
percentage point increase is associated with a 9.2-9.4 percentage point increase in
GEQGDP. The smaller point estimates as compared to Table 2 indicates that a higher
value of STKCAP is also associated with a rise in debt cross-holdings. As in Table 2, the
coefficient on CUMPRIVAT is negative, while neither TAXRATE nor PROTECTION are
important. Overall, countries less open to trade, with shallow domestic financial markets,
and large-scale privatization activities have smaller international cross-holdings.

We turn to the equity share in total external holdings (GEQSHARE) in Table 4. ¹⁷ The
results here are generally weaker than for the aggregate volume measures in Tables 2 and
3. Not surprisingly, STKCAP again exerts a significantly positive influence; the overall
explanatory power also rises from 0.19 to 0.53 once the financial variables are included.
Another other notable finding is that FINDEPTH exerts a significantly negative influence
on the equity share: a reasonable interpretation is that FINDEPTH disproportionately
increases international trade in debt instruments. Finally, columns (6)-(7) show that

¹⁷ In results not reported, and available upon request, we also examined separately the
equity ratios for the asset and liability sides of the international balance sheet, and the ratio
of portfolio equity liabilities to domestic stock market capitalization. For the latter, an
increase in goods trade is associated with a rise in the ratio.

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