Can Cross-Border Funding Frictions Explain Financial Integration Reversals?

We examine the role of funding frictions in international investments. Guided by an international margin-CAPM, we use observed stock prices to infer the variation in the magnitude and the implicit cost of barriers that impede the funding of cross-border positions. Our measure helps explain the dynamics of global market integration, revealing periods when funding barriers become more severe. These periods coincide with reversals in market integration documented in the literature but not explained by other foreign investment barriers. We confirm the funding friction channel with alternative financial integration measures, institutional portfolio holdings, and international capital flows.