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Does financial openness lead to deeper domestic financial markets ?

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  • Calderon, Cesar
  • Kubota, Megumi

Abstract

Advanced and emerging market economies have rapidly integrated into international capital markets and this growing globalization of financial markets has led to some important changes in the patterns of saving and investment across the world. The main goal of this paper is to test whether the cross-border asset trade has led to improvements in the intermediation of these savings -- that is, foster development of domestic financial markets. The authors have collected annual information on financial market development, financial openness, and other control variables for a sample of 145 countries for the period 1974-2007. Controlling for the likely endogeneity of financial openness, the analysis finds that rising financial openness expands private credit, bank assets, and stock market and private bond market development, and generates efficiency gains in the banking system. However, the impact of financial openness on domestic financial development may depend on the level of institutional quality, the extent of investor protection, and the degree of trade openness. In general, rising financial openness will enlarge the size and activity of financial intermediaries, improve efficiency in the banking system, and contribute to deepen private bond markets in countries with moderate to high levels of institutional quality and investor protection as well as in countries with high trade openness.

Suggested Citation

  • Calderon, Cesar & Kubota, Megumi, 2009. "Does financial openness lead to deeper domestic financial markets ?," Policy Research Working Paper Series 4973, The World Bank.
  • Handle: RePEc:wbk:wbrwps:4973
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    Cited by:

    1. BOUKEF JLASSI, NABILA & Hamdi, Helmi, 2015. "The relationship between Financial liberalization, Financial Stability and Capital Control: Evidence from a multivariate framework for developing countries," MPRA Paper 64328, University Library of Munich, Germany.
    2. Calderón, César & Kubota, Megumi, 2013. "Sudden stops: Are global and local investors alike?," Journal of International Economics, Elsevier, vol. 89(1), pages 122-142.
    3. Edgar Demetrio Tovar García., 2012. "Financial Globalization and Financial Development in Transition Countries," Economía: teoría y práctica, Universidad Autónoma Metropolitana, México, vol. 36(1), pages 155-178, Enero-Jun.
    4. Víctor Alexánder Díaz España, 2014. "Crédito privado, crédito bancario y producto interno bruto: evidencia para una muestra suramericana," ENSAYOS SOBRE POLÍTICA ECONÓMICA, BANCO DE LA REPÚBLICA - ESPE, vol. 32(73), pages 104-126, July.
    5. Gourène, Grakolet Arnold Zamereith & Mendy, Pierre, 2015. "Oil Prices and African Stock Markets Co-movement: A Time and Frequency Analysis," MPRA Paper 75852, University Library of Munich, Germany.
    6. Edgar Demetrio Tovar García, 2012. "Financial globalization and financial development in Latin America," REVISTA CUADERNOS DE ECONOMÍA, UN - RCE - CID, August.
    7. Guillermo Perry, 2013. "Regional Public Goods in Finance, Trade and Infrastructure," DOCUMENTOS CEDE 011888, UNIVERSIDAD DE LOS ANDES-CEDE.
    8. Gourène, Grakolet Arnold Zamereith & Mendy, Pierre & Ake N'gbo, Gilbert Marie, 2017. "Multiple time-xcales analysis of global stock markets spillovers effects in African stock markets," MPRA Paper 77632, University Library of Munich, Germany.
    9. repec:wsi:rpbfmp:v:20:y:2017:i:03:n:s0219091517500163 is not listed on IDEAS
    10. Shijaku, Gerti, 2013. "The probability of sudden stop of capital flows - the case of Albania," MPRA Paper 79138, University Library of Munich, Germany.
    11. Edgar Demetrio Tovar, 2011. "Globalización financiera y sus efectos sobre el desarrollo financiero," Ensayos sobre Política Económica, Banco de la Republica de Colombia, vol. 29(66), pages 80-127, Diciembre.
    12. Sasidaran Gopalan, 2015. "Does Foreign Bank Entry Contribute to Financial Depth?: Examining The Role of Income Thresholds," HKUST IEMS Working Paper Series 2015-05, HKUST Institute for Emerging Market Studies, revised Feb 2015.

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    Keywords

    Debt Markets; Emerging Markets; Economic Theory&Research; Currencies and Exchange Rates;

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