A dark side of international capital market integration: Domestic investors' view

In Joon Kim, So Jung Kim, Sun Joong Yoon

Research output: Contribution to journalArticlepeer-review

5 Scopus citations

Abstract

We explore the impact of capital market integration on the welfare of domestic investors, in particular, with closed-form solutions to optimal asset holdings and utility changes in a simple equilibrium framework wherein agents have mean-variance utility. Our model allows us to show the welfare loss of domestic investors with inefficient portfolios from market integration. The results indicate that only efficient portfolio holdings before integration can guarantee the welfare enhancement of all domestic investors, in contrast to the extant literature, which emphasizes the beneficial effects of market integration. In addition, we decompose the welfare changes of domestic investors into two components, i.e., the correlation effect and the quantity-volatility effect, to enhance our understanding of economic implications.

Original languageEnglish
Pages (from-to)238-256
Number of pages19
JournalInternational Review of Economics and Finance
Volume33
DOIs
StatePublished - Sep 2014

Keywords

  • Capital market integration
  • Correlation effect
  • G11
  • G12
  • Quantity-volatility effect
  • Welfare loss

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