International Capital Flows, Returns and World Financial Integration

Martin D. D. Evans, Viktoria Hnatkovska

NBER Working Paper No. 11701
Issued in October 2005
NBER Program(s):International Finance and Macroeconomics

International capital flows have increased dramatically since the 1980s, with much of the increase being due to trade in equity and debt 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 fall dramatically but continue to exceed the size and volatility of international equity flows. This is the natural outcome of greater risk sharing facilitated by increased integration. We find that the equilibrium flows in bonds and stocks are larger than their empirical counterparts, and are largely driven by variations in equity risk premia. The paper also makes a methodological contribution to the literature on dynamic general equilibrium asset-pricing. We implement a new technique for solving a dynamic general equilibrium model with production, portfolio choice and incomplete markets.

download in pdf format
   (530 K)

email paper

Machine-readable bibliographic record - MARC, RIS, BibTeX

Document Object Identifier (DOI): 10.3386/w11701

Published: Evans, Martin D.D. & Hnatkovska, Viktoria V., 2014. "International capital flows, returns and world financial integration," Journal of International Economics, Elsevier, vol. 92(1), pages 14-33. citation courtesy of

Users who downloaded this paper also downloaded* these:
van Wincoop and Tille w12856 International Capital Flows
Gourinchas and Jeanne w13602 Capital Flows to Developing Countries: The Allocation Puzzle
Alfaro, Kalemli-Özcan, and Volosovych Capital Flows in a Globalized World: The Role of Policies and Institutions
Feldstein and Horioka w0310 Domestic Savings and International Capital Flows
Tille and van Wincoop w14390 International Capital Flows under Dispersed Information: Theory and Evidence
NBER Videos

National Bureau of Economic Research, 1050 Massachusetts Ave., Cambridge, MA 02138; 617-868-3900; email:

Contact Us