Can Cross-Border Funding Frictions Explain Financial Integration Reversals?
Forthcoming at the Review of Financial Studies
74 Pages Posted: 11 Sep 2017 Last revised: 28 Nov 2020
Date Written: June 1, 2019
We show that constraints on using leverage for foreign positions can act as an international investment barrier. Guided by an international CAPM with leverage constraints, we use observed stock prices to measure the variation in the magnitude and the implicit cost of such cross-border funding barriers. Our measure helps explain the dynamics of global market integration and, in particular, its reversals documented in the literature but not explained by other international investment barriers. We confirm our results using alternative financial integration measures, international capital flows, and institutional portfolio holdings.
Keywords: International Finance, Market Segmentation, Integration Reversals, Funding Liquidity
JEL Classification: F36, G01, G12, G15
Suggested Citation: Suggested Citation