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International capital fl ows , returns and world fi nancial integration
| Content Provider | Semantic Scholar |
|---|---|
| Author | Evans, Martin David Hnatkovska, Viktoria V. |
| Copyright Year | 2016 |
| Abstract | a r t i c l e i n f o International capital flows have increased dramatically since the 1980s, with much of the increase being due to trade in equity and bond markets. Such developments are often attributed to the increased integration of world financial markets. We present a model that allows us to examine how greater integration in world financial markets affects the behavior of international capital flows and financial returns. Our model predicts that international capital flows are large (in absolute value) and very volatile during the early stages of financial integration when international asset trading is concentrated in bonds. As integration progresses and households gain access to world equity markets, the size and volatility of international bond flows decline. This is the natural outcome of greater risk sharing facilitated by increased integration. This pattern is consistent with declining volatility observed during 1975–2007 period in the G-7 countries. We also find that the equilibrium flows in bonds and stocks predicted by the model are larger than their empirical counterparts, and are largely driven by variations in equity risk premia. The model also predicts that volatility of equity and bond returns decline with integration, again consistent with the data for G-7 economies. International capital flows have increased dramatically since the 1980s. During the 1990s gross capital flows between industrial countries rose by 300%, while trade flows increased by 63% and real GDP by a comparatively modest 26%. In this paper we document that much of the increase in capital flows is due to trade in equity and debt markets , with the result that the international pattern of asset ownership looks very different today than it did a decade ago. The changes in the holdings of equity and debt have also coincided with significant changes in the volatility of capital flows and asset returns. Among the G-7 countries , the volatilities of equity and debt flows fell throughout the 1975–2007 period. For instance, the volatility of debt inflows and out-flows declined, on average, by about 30% between 1975–1995 and 1996–2007. The volatility of equity outflows fell by approximately 40% during the same periods. The volatility of equity and debt returns in the G-7 have also fallen during the same period — by 25% for equity returns and by almost 60% for bond returns. These developments are often linked to the increased integration of world financial markets. Easier access … |
| File Format | PDF HTM / HTML |
| Alternate Webpage(s) | http://isiarticles.com/bundles/Article/pre/pdf/51505.pdf |
| Language | English |
| Access Restriction | Open |
| Content Type | Text |
| Resource Type | Article |
