International Financial Integration*

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portfolio equity holdings in international risk sharing. Lane and Milesi-Ferretti (2002a,
2002b) provide some initial evidence on the behavior of overall rates of return.

The plan for the rest of the paper is as follows. We discuss data issues and capture some
basic facts about our data in Section 2. We examine the determinants of variation in the
scale of international financial integration in Section 3. We turn to examining rates of
returns and yields on foreign assets and liabilities in Section 4. Section 5 offers some
conclusions.

II. Data Issues and Broad Trends

We study international financial integration using data on countries’ portfolios of external
assets and liabilities—the so-called International Investment Position (IIP). These data
summarize total holdings by domestic residents of financial claims on the rest of the
world, and nonresidents’ claims on the domestic economy. Following the methodology of
the Balance of Payments Manual 5 (IMF, 1993), external liabilities are divided into five
main categories: foreign direct investment (FDI), portfolio equity investment, portfolio
debt investment, other investment, and derivatives. Assets are instead divided into six
categories: the same five as liabilities, plus official reserves. Table A1 summarizes country
and period coverage for the main categories of external assets and liabilities. The main
data source is the International Monetary Fund’s Balance of Payments Statistics, but we
also made use of data from national sources. A data appendix describes data sources in
more detail.

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