The determinants of international financial integration revisited: the role of networks and geographic neutrality

Arribas, Iván and Pérez, Francisco and Tortosa-Ausina, Emili (2009): The determinants of international financial integration revisited: the role of networks and geographic neutrality. Published in: Fundación BBVA - Documentos de Trabajo No. 15 (2009)

Abstract

Over the last two decades, the degree of international financial integration has increased substantially, becoming an important area of research for many financial economists. This paper explores the determinants of the asymmetries in the international integration of banking systems. We consider an approach based on both network analysis and the concept of geographic neutrality. Our analysis focuses on the banking systems of 18 advanced economies from 1999 to 2005. Results indicate that banking integration should be assessed from the perspective of both inflows and outflows, given that they show different patterns for different countries. Using standard techniques, our results reinforce previous findings by the literature—especially the remarkable role of both geographic distance and trade integration. Nonparametric techniques reveal that the effect of the covariates on banking integration is not constant over the conditional distribution which (in practical terms) implies that the sign of the relationship varies across countries.

• Item Type: MPRA Paper
• Language: English
• Keywords: banking integration, geographic neutrality, network analysis, nonparametric regression
• Subjects: F - International Economics > F1 - Trade > F15 - Economic Integration; F - International Economics > F2 - International Factor Movements and International Business > F21 - International Investment ; Long-Term Capital Movements; Z - Other Special Topics > Z1 - Cultural Economics ; Economic Sociology ; Economic Anthropology > Z13 - Economic Sociology ; Economic Anthropology ; Social and Economic Stratification; F - International Economics > F3 - International Finance > F36 - Financial Aspects of Economic Integration

References

Aitchison, J. and Aitken, C. G. G. (1976). Multivariate binary discrimination by the kernel method. Biometrika, 63(3):413–420.

Alesina, A. and Spolaore, E. (1997). On the number and size of nations. Quarterly Journal of Economics, 112:1027–56.

Anderson, J. and Marcouiller, D. (2002). Insecurity and the pattern of trade: An empirical investigation. Review of Economics and Statistics, 84(2):342–352.

Annen, K. (2003). Social capital, inclusive networks, and economic performance. Journal of Economic Behavior & Organization, 50:449–463.

Arribas, I., Pérez, F., and Tortosa-Ausina, E. (2008). Geographic neutrality: measuring international trade integration. Moneda y Crédito, 226:137–177.

Arribas, I., Pérez, F., and Tortosa-Ausina, E. (2009). Measuring globalization of international trade: Theory and evidence. World Development, 37(1):127–145.

Aviat, A. and Coeurdacier, N. (2007). The geography of trade in goods and asset holdings. Journal of International Economics, 71(1):22–51.

Baele, L., Ferrando, A., Hordahl, P., Krylova, E., and Monnet, C. (2004). Measuring European financial integration. Oxford Review of Economic Policy, 20(4):509–530.

Barrat, A., Barthélemy, M., and Vespignani, A. (2004). Weighted evolving networks: Coupling topology and weight dynamics. Physical Review Letters, 92 (22).

Barthélemy, M., Barrat, A., Pastor-Satorras, R., and Vespignani, A. (2005). Characterization and modeling of complex weighted networks. Physica A, 346:34–43.

Berger, A., Ongena, S., Smith, D., and Dai, Q. (2003). To what extent will the banking industry be globalized? A study of bank nationality and reach in 20 European nations. Journal of Banking & Finance, 27(3):383–415.

Berger, A. N. (2003a). The efficiency effects of a single market for financial servies in Europe. European Journal of Operational Research, 150:466–481.

Berger, A. N., De Young, R., Genay, H., and Udell, G. F. (2000). Globalization of financial institutions: Evidence from cross-border banking performance. In Litan, R. E. and Santomero, A. M., editors, Papers on Financial Services, Economics, pages 23–158. Brookings Institution Press, Washington, D.C.

Berger, Allen N.; Smith, D. C. (2003b). Global integration in the banking industry. Federal Reserve Bulletin, 89(11):451–460.

Buch, C. M. (2005). Distance and international banking. Review of International Economics, 13(4):787–804.

Cabral, I., Dierick, F., and Vesala, J. (2002). Banking integration in the Euro area. ECB Occasional Paper Series 6, European Central Bank, Frankfurt.

Deardorff, A. V. (1998). Determinants of bilateral trade: Does gravity work in a neoclassical world? In Frankel, J., editor, The Regionalization of the World Economy, pages 7–22. Chicago University of Chicago Press, Chicago.

Eaton, J. and Kortum, S. (2002). Technology, Geography, and Trade. Econometrica, 70(5):1741–1779.

Edison, H., Levine, R., Ricci, L., and Sløk, T. (2002). International financial integration and economic growth. Journal of International Money and Finance, 21(6):749–776.

Ekinci, M. F., Kalemli-Ozcan, S., and Sørensen, B. (2008). Capital flows within EU countries: The role of institutions, confidence and trust. NBER International Seminar on Macroeconomics, forthcoming.

European Central Bank (2007). Financial Integration in Europe. Technical report, ECB, Frankfurt.

Fagiolo, G., Reyes, J., and Schiavo, S. (2007a). The evolution of the world trade web. Working Paper Series 17, Laboratory of Economics and Management (LEM), Sant’Anna School of Advanced Studies, Pisa.

Fagiolo, G., Reyes, J., and Schiavo, S. (2007b). International trade and financial integration: A weighted network analysis. Document de travail 2007–11, Observatoire Français des Conjonctures Économiques (OFCE), Paris.

Fratianni, M. and Kang, H. (2006). Heterogeneous distance–elasticities in trade gravity models. Economics Letters, 90(1):68–71.

French, K. and Poterba, J. (1991). Investor diversification and international equity markets. American Economic Review, 81(2):222–226.

Fukuyama, F. (2002). Social capital and development: The coming agenda. SAIS Review, 22(1):23–37.

García-Herrero, A. and Wooldridge, P. (2007). Global and regional financial integration: progress in emerging markets. BIS Quarterly Review, pages 57–70. September.

Garlaschelli, D. and Loffredo, M. (2005). Structure and evolution of the world trade network. Physica A, 355:138–144.

Guiso, L., Sapienza, P., and Zingales, L. (2004). The role of social capital in financial development. American Economic Review, 94(3):526–556.

Hanneman, R. and Riddle, M. (2005). Introduction to Social Network Methods. Technical report, University of California at Riverside, Department of Sociology.

Henderson, D. and Millimet, D. (2008). Is gravity linear? Journal of Applied Econometrics, 23:137–172.

Henry, P. (2000a). Do stock market liberalizations cause investment booms? Journal of Financial Economics, 58(1-2):301–334.

Henry, P. (2000b). Stock Market Liberalization, Economic Reform, and Emerging Market Equity Prices. The Journal of Finance, 55(2):529–564.

Hsiao, C., Li, Q., and Racine, J. (2007). A consistent model specification test with mixed categorical and continuous data. Journal of Econometrics, 140(2):802–826.

Iapadre, L. (2006). Regional integration agreements and the geography of world trade: measurement problems and empirical evidence. In De Lombaerde, P., editor, Assessment and Measurement of Regional Integration, pages 65–85. Routledge, London.

Kali, R., Méndez, F., and Reyes, J. (2007). Trade structure and economic growth. Journal of International Trade & Economic Development, 16(2):245–269.

Kali, R. and Reyes, J. (2007). The architecture of globalization: a network approach to international economic integration. Journal of International Business Studies, 38:595–620.

Kali, R. and Reyes, J. (2009). Financial contagion on the international trade network. Economic Inquiry, forthcoming.

Kang, J. and Stulz, R. (1997). Why is there a home bias? An analysis of foreign portfolio equity ownership in Japan. Journal of Financial Economics, 46(1):3–28.

Kim, S. and Shin, E.-H. (2002). A longitudinal analysis of globalization and regionalization in international trade: A social network approach. Social Forces, 81:445–471.

Koenker, R. (2005). Quantile Regression. Cambridge University Press.

Kose, M. A., Prasad, E., Rogoff, K. S., and Wei, S.-J. (2006). Financial globalization: A reappraisal. Working Paper 12484, National Bureau of Economic Research.

Krugman, P. R. (1996). Regionalism versus multilateralism: analytical notes. In de Melo, J. and Panagariya, A., editors, New Dimensions in Regional Integration, CEPR, chapter 3, pages 58–89. Cambridge University Press, Cambridge.

Kunimoto, K. (1977). Typology of trade intensity indices. Hitotsubashi Journal of Economics, 17(2):15–32.

Laeven, L. and Majnoni, G. (2005). Does judicial efficiency lower the cost of credit? Journal of Banking and Finance, 29(7):1791–1812.

Lane, P. R. and Milesi-Ferretti, G. M. (2003). International financial integration. IMF Staff Papers, 50:82–113.

Lane, P. R. and Milesi-Ferretti, G. M. (2008). The drivers of financial globalization. American Economic Review Papers and Proceedings, 98(2):327–332.

Lemmen, J. and Eijffinger, S. (1996). The fundamental determinants of financial integration in the European Union. Review of World Economics, 132(3):432–456.

Lewis, K. (1999). Trying to explain home bias in equities and consumption. Journal of Economic Literature, 37(2):571–608.

Li, Q. (1996). Nonparametric testing of closeness between two unknown distribution functions. Econometric Reviews, 15:261–274.

Li, Q. and Racine, J. (2004). Cross-validated local linear nonparametric regression. Statistica Sinica, 14(2):485–512.

Li, Q. and Racine, J. S. (2007). Nonparametric Econometrics: Theory and Practice. Princeton University Press, Princeton and Oxford.

Manna, M. (2004). Developing statistical indicators of the integration of the Euro area banking system. Working Paper Series 300, European Central Bank, Frankfurt am Main.

McCallum, J. (1995). National borders matter: Canada-US regional trade patterns. American Economic Review, 85(3):615–623.

McGuire, P. and Tarashev, N. (2006). Tracking international bank flows. BIS Quarterly Review, pages 27–28.

Mishkin, F. (2007). Is financial globalization beneficial? Journal of Money, Credit and Banking, 39(2–3):259–294.

Moshirian, F. (2008). Financial services in an increasingly integrated global financial market. Journal of Banking & Finance, 32(11):2288–2292.

Nitsch, V. (2000). National borders and international trade: evidence from the European Union. Canadian Journal of Economics, 33(4):1091–1105.

Obstfeld, M. and Rogoff, K. (2000). The six major puzzles in international macroeconomics: Is there a common cause? NBER Macroeconomics Annual, pages 339–390.

Obstfeld, M. and Taylor, A. (2005). Global Capital Markets: Integration, Crisis, and Growth. Cambridge University Press.

OECD (2005). Measuring Globalisation. OECD Handbook on Economic Globalisation Indicators. Statistics. OECD Publishing, Paris.

Papaioannou, E. (2009). What drives international financial flows? Politics, institutions and other determinants. Journal of Development Economics, 88(2):269–281.

Pérez, D., Salas-Fumás, V., and Saurina, J. (2005). Banking integration in Europe. Moneda y Crédito, (220):105–144.

Portes, R. and Rey, H. (2005). The determinants of cross-border equity flows. Journal of International Economics, 65(2):269–296.

Portes, R., Rey, H., and Oh, Y. (2001). Information and capital flows: The determinants of transactions in financial assets. European Economic Review, 45(4-6):783–796.

Racine, J. (1997). Consistent significance testing for nonparametric regression. Journal of Business and Economic Statistics, 15:369–378.

Racine, J., Hart, J., and Li, Q. (2006). Testing the significance of categorical predictor variables in nonparametric regression models. Econometric Reviews, 25(4):523–544.

Racine, J. and Li, Q. (2004). Nonparametric estimation of regression functions with both categorical and continuous data. Journal of Econometrics, 119(1):99–130.

Rauch, J. E. (2001). Business and social networks in international trade. Journal of Economic Literature, 39:1177–1203.

Rose, A. (2000). One money, one market: the effect of common currencies on trade. Economic Policy, 15(30):7–46.

Vo, X. and Daly, K. (2007). The determinants of international financial integration. Global Finance Journal, 18(2):228–250.

von Peter, G. (2007). International banking centres: a network perspective. BIS Quarterly Review, pages 33–45. December.

Warnock, F. and Cleaver, C. (2003). Financial centres and the geography of capital flows. International Finance, 6(1):27–59.

Wasserman, S. and Faust, K. (1992). Social Network Analysis: Methods and Applications. Number 8 in Structural Analysis in the Social Sciences. Cambridge University Press, Cambridge.

Wellman, B. and Berkovitz, S. (1988). Social Structure. Cambridge University Press, Cambridge.

Yeandle, M., Knapp, A., Mainelli, M., and Harris, I. (2008). The Global Financial Centres Index. Yen/The City of London, London.