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Real effects of financial market integration: does lower home bias lead to welfare benefits?

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  • Crina Pungulescu

Abstract

This paper proposes equity home bias as a proxy for financial integration in the ongoing empirical debate on the impact of financial integration on economic growth. In integrated markets, investors are expected to take full advantage of the potential for international diversification. The extent of equity home bias (i.e. overinvesting in domestic stocks and foregoing gains from international diversification) provides a relevant quantity-based measure of financial integration. Using different techniques to compute home bias, this paper investigates whether countries with lower home bias experience faster economic growth. Additionally, the analysis extends to the link between (decreasing) home bias and international risk sharing and income inequality. The results suggest that financial integration, proxied by the decreasing equity home bias, is positively associated with economic growth and international risk sharing. At the same time, it appears that higher financial integration pairs with higher income inequality.

Suggested Citation

  • Crina Pungulescu, 2015. "Real effects of financial market integration: does lower home bias lead to welfare benefits?," The European Journal of Finance, Taylor & Francis Journals, vol. 21(10-11), pages 893-911, August.
    • Handle: RePEc:taf:eurjfi:v:21:y:2015:i:10-11:p:893-911
    DOI: 10.1080/1351847X.2012.744762
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    Cited by:

    1. Pei-Ling Lee & Lee Chin & Siong Hook Law & W.N.W. Azman-Saini, 2017. "Do integrated economies grow faster? Evidence from domestic equity holdings," Economics Bulletin, AccessEcon, vol. 37(4), pages 2905-2916.
    2. Pornpen Sodsrichai & Sakkapop Panyanukul & Nantaporn Pongpatthananon, 2011. ""Putting All Eggs in One Basket" Thailand's Under-Investment Abroad: Impact and Explanations," Working Papers 2011-06, Monetary Policy Group, Bank of Thailand.

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