De facto financial globalisation is typically measured a proxy consisting of the ratio of cross-border assets and liabilities (averaged) over GDP. Based on data on cross-border holdings compiled by Lane and Milessi Ferreti (2007), this measure indicates that:
- Financial globalisation in emerging markets has been lagging that in more advanced markets;
- It has been driven by FDI (and, more recently, equities) at the expense of debt liabilities;
- In advanced economies, it is still largely dominated by debt securities (see Figure 11) .
Figure 1. Financial globalisation measures: Emerging markets vs. others
Note: PCE (peripheral core economies): Australia, Canada, New Zealand, Norway, Sweden. G5: France, Germany, Italy, Japan, the U.S. Figures shows country group averages of de facto financial globalisation measures over GDP and de jure measure of financial globalisation for balanced panel data. Only countries with complete data from 1990 to 2007 were used. Source: LMF (2008), WDI, Chinn-Ito.
The last point is more clearly seen by comparing changes in gross foreign positions (Figure 2). The marked decline in debt liabilities (coupled with the build-up of reserves) due to the sovereign deleveraging process in emerging markets contrasts with the growing net debt of G5 countries. More generally, though, Figures 1 and 2 indicate that aggregate financial-globalisation-to-GDP ratios have been growing across the board.
Figure 2. From 1999 to 2007: merging Markets vs. others
Note: Figures presents changes of de facto financial globalisation measures from LMF (2008) over GDP. Countries in this figure are the same as in F1a. Changes are from 1999 to 2007. Source: LMF (2007), WDI.
For a number of reasons, however, a normalisation by the capitalisation of the local market (marcap) seems more appropriate.
- For starters, the role of cross-border holdings and flows as a source of international contagion and exogenous price volatility should be a function of their size relative to the host market.
- Moreover, an increasing financial-globalisation-to-GDP, rather than a sign of growing globalisation as it is typically interpreted, could instead be the reflection of a deepening of local markets, regardless of the pattern of foreign participation.
In turn, much of this local market “deepening” may be mechanically driven by valuation changes, due to the equity rally and the real appreciation in emerging markets prior to the 2008 crisis (Levy Yeyati 2011).
As Figure 3 shows, local markets size indeed played a central role in explaining the rising financial-globalisation-to-GDP ratios. For example, 7% out of the 10% increase in equity foreign liabilities is explained by an increase in marcap over GDP, which suggests that, rather than leading the deepening of local equity markets, foreign investors may have accompanied the growth in market capitalisation due to higher equity prices.
Figure 3. Financial globalisation and different normalisations: Merging markets vs. others
Note: Figures presents changes foreign equity/debt liabilities divided by market capitalization/Total Debt or GDP. Changes are from 1999 to 2007. Source: LMF (2007), WDI, BIS.
Financial globalisation and international risk sharingIn theory, countries with greater financial globalisation should reduce consumption relative to output volatility through international risk sharing. However, recent empirical studies have failed to validate this premise.2
The degree of risk sharing can be proxied by “consumption betas” estimated by the slope of per capita consumption to output growth, both taken as deviations from world levels.
As Figure 4 shows, estimated consumption betas are negatively correlated with financial-globalisation-to-GDP ratios for the advanced-markets sample, but the link is not significant (and of the opposite sign) for emerging markets –in line with the disappointing results reported in Kose et al. (2007).
Figure 4. Risk sharing: Consumption betas vs. financial globalisation