Foreign Ownership and World Market Integration

The goal of this paper is to explain the de facto financial market integration to global markets with foreign equity ownership using a unique data set of foreign portfolio flows at the individual stock level. The main result is the positive link between global financial integration and past portfolio inflows by foreign investors on the cross-section of local stocks. The results have high economic significance. Across individual stocks a 2.4% increase in foreign portfolio inflows corresponds to up to 13.5% greater relative explanatory power of the global factor in explaining local stock returns in the following month. The lead-lag effect between foreign portfolio inflows and financial integration does not exist in the opposite direction. I show that stocks that experience an increase in foreign ownership are not more financially integrated in the past, i.e. the foreign portfolio flows are not a response to increased financial integration.