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Advanced and emerging market economies have rapidly integrated into international capital markets and this growing globalization of financial markets has led to some important changes in the patterns of saving and investment across the world. The main goal of this paper is to test whether the cross-border asset trade has led to improvements in the intermediation of these savings - that is, foster development of domestic financial markets. The authors have collected annual information on financial market development, financial openness, and other control variables for a sample of 145 countries for the period 1974-2007. Controlling for the likely endogeneity of financial openness, the analysis finds that rising financial openness expands private credit, bank assets, and stock market and private bond market development, and generates efficiency gains in the banking system. However, the impact of financial openness on domestic financial development may depend on the level of institutional quality, the extent of investor protection, and the degree of trade openness. In general, rising financial openness will enlarge the size and activity of financial intermediaries, improve efficiency in the banking system, and contribute to deepen private bond markets in countries with moderate to high levels of institutional quality and investor protection as well as in countries with high trade openness.

Access to Finance --- Bank assets --- Banking system --- Banks and Banking Reform --- Bond market --- Bond market development --- Currencies and Exchange Rates --- Debt Markets --- Domestic financial markets --- Economic Theory and Research --- Emerging market --- Emerging market economies --- Emerging Markets --- Finance and Financial Sector Development --- Financial development --- Financial market --- Financial openness --- Globalization --- International capital --- International capital markets --- Investment --- Investor --- Macroeconomics and Economic Growth --- Market development --- Private bond --- Private credit --- Private Sector Development --- Stock --- Stock market

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Over the past decades, many countries have implemented significant reforms to foster capital market development. Latin American countries were at the forefront of this process. The authors analyze where Latin American capital markets stand after these reforms. They find that despite the intense reform effort, capital markets in Latin America remain underdeveloped relative to markets in other regions. Furthermore, stock markets are below what can be expected, given Latin America's economic and institutional fundamentals. The authors discuss alternative ways of interpreting this evidence. They argue that it is difficult to pinpoint which policies Latin American countries should pursue to overcome their poor capital market development. Moreover, they argue that expectations about the outcome of the reform process may need to be revisited to take into account intrinsic characteristics of emerging economies. The latter may limit the scope for developing deep domestic capital markets in a context of international financial integration.

Bank Policy --- Bond --- Bond Market --- Bond Market Development --- Capital Market --- Capital Market Development --- Capital Market Reforms --- Capital Markets --- Debt Markets --- Domestic Capital --- Domestic Capital Markets --- Economic Theory and Research --- Emerging Economies --- Emerging Markets --- Exchange --- Finance and Financial Sector Development --- Financial Liberalization --- Financial Markets --- International Financial Integration --- Macroeconomics and Economic Growth --- Markets and Market Access --- Private Sector Development --- Stock --- Stock Market --- Stock Market Development --- Stock Markets