Essays on financial integration

Essays collected in this dissertation analyze two issues related to increasing integration in the world financial market and their implications.; First two essays analyze financial integration of national stock markets. Essay I shows that large adverse shocks are more highly correlated with one another than positive shocks across national stock markets. I show that the negative skewness of the world market portfolio risk is primarily responsible for it. This finding suggests that U.S. investors' benefit from international portfolio diversification could be much more limited than is commonly thought. Essay II considers various methods to empirically test for financial integration in a unified framework. In addition to the conventional test of the common price of risk, the new approaches based on the stochastic discount factor are also examined. Empirical tests using the cross-section data from Japan and U.S. stock markets reveal that existing methods do not provide a sufficient and satisfactory measure of financial integration.; In Essay III, coauthored with Takatoshi Ito, we examine the behavior of Japanese stock and land prices during the Bubble Economy of the second half of the 1980s, paying considerable attention to the linkage of the two markets and the effects of monetary policy. One important finding in this essay is that changing lending behavior of Japanese banks played an important role in generating the tremendous boom in asset markets in the 1980s. This is deeply related to the internationalization of Japanese financial markets in the form "securitization" that defined as increased reliance of the financial system on markets in equities and bonds at the expense of banks and other traditional financial intermediaries.