International Financial Integration*

-17-

CUMPRIVAT has a significantly positive impact on GEQSHARE: the contrast with the
result in column (5) is entirely driven by the change in sample size, due to the lack of tax
data for some countries.¹⁸

In summary, this section has investigated the covariates of the growth in international
financial integration. We have shown that variables such as trade openness, GDP per
capita, and stock market capitalization are quite successful in ‘explaining’ the variation
over time in the degree of international financial integration. Clearly, a future goal is to
better establish lines of causality between these variables and our measures of external
financial activity.

IV. Analysis of Rates of Return

In this section, we investigate the rates of return earned on foreign assets and liabilities.
First, we describe the broad patterns in the data. Second, we ask whether the rates of return
on foreign assets and liabilities are well tracked by various market indices.¹⁹ Third, we
examine whether the pattern of international investment indeed contributes to risk
diversification. Finally, we explore the co-movement between local and foreign real rates
of return and real exchange rates.

¹⁸ These are Denmark, Norway, Switzerland, Iceland, Australia, and New Zealand.

¹⁹ For instance, if a country allocates its equity investment across countries in proportion
to relative stock market capitalizations, the rate of return on foreign equity assets would
just follow a global market index.

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