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Can Cross-Border Funding Frictions Explain Financial Integration Reversals?

Published: 23 March 2022

Authors: A. Akbari, Francesca Carrieri and A. Malkhozov

Publication: The Review of Financial Studies, Volume 35, Issue 1, January 2022, Pages 394–437

Abstract:

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.


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