International Financial Integration*

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b) The weighted average of stock returns on individual markets, as reported by
MSCI, where the weights reflect the country’s allocation of portfolio equity
assets reported in the IMF 1997 Portfolio Survey.

• For FDI liabilities, we use the same indices as for equity liabilities.

• For FDI assets, we construct the rate of return by using a weighted average of stock
returns on individual markets, where the weights reflect the geographical allocation
of FDI assets as reported by the OECD.

• For debt liabilities, which include portfolio debt and other investment, we use
domestic bond returns from Global Financial data. We also compare yields with
domestic short-term and long-term interest rates (from the OECD database).

• For debt assets, we construct several indices:

a) A weighted return and yield on a foreign bond portfolio, where weights are
obtained from the 1997 IMF Portfolio Survey, bond returns from Global
Financial Data, and interest rates from the OECD.

b) A weighted yield on a foreign debt portfolio, where weights are obtained from
BIS data on the geographical allocation of bank assets, and interest rate data
are from the OECD. With the BIS data, we are also able to take into account
the fraction of foreign loans that are denominated in domestic currency versus
foreign currency.

These indices can help us shed light on the degree to which rates of return and yields on
external assets and liabilities can be explained by market developments and investment
patterns. Obviously, even if the rate of return on individual asset categories, such as debt
and portfolio equity, were the same for all countries, cross-country differences in overall
rates of return may still arise because of differences in the composition of country
portfolios. Indeed, one important ‘candidate’ for the explanation of the stylized facts listed

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