Integration of Financial Markets over past 25 years Essay

Integration of Financial Markets over past 25 years - Essay Example The world has become a smaller place and globalization has contributed towards the growth of international credit as a result of an international integration of the goods and services market and the growing presence of multinational companies. The GNP has seen more than twice growth in the share of imports and exports for most nations which in turn brought about a large increase in international lending and borrowings for the purpose of addressing the needs of current account transactions (Bekeart, Harvey, and Lumsdaine, 2002). Open financial markets have been regarded as an opportunity for expansion of investor’s portfolio diversification scope and therefore has a higher potential for greater risk-adjusted return. For the country, smooth consumption is allowed and saves them from potential shocks. Financial flows also result in the flow of capital with potential welfare gains and growth and international risk sharing. The costs of financial integration might also be as drastic as its benefits. Countries run the risk of reversal of capital flows and the risk of increased volatility through a largely open capital market. The recent financial crisis has been an example of the drawbacks of financial integration worldwide where the financial meltdown in one country has impacted the complete global economy. Although there was some misalignment of fundamentals, the financial crisis has brought focus to the instability inherent within the financial markets as a result of the financial integration process. This calls for a stronger regulatory supervision and more stubborn financial systems (Agà ©nor, 2001). The paper is organized beginning with a discussion on the operational significance of international financial markets and moves on to evaluate determinants of foreign exchange markets for the long run and the short run. The paper also analyses the international stock exchange and its role and reflection on the financial integration.