Can Cross-Border Funding Frictions Explain Financial Integration Reversals?

We examine the role of funding frictions in international investments. Guided by an international CAPM with funding constraints, we use the differences in the betting-against-beta portfolio performance between countries to infer the magnitude and the implicit cost of barriers that impede the funding of cross-border positions. We find such cross-border funding barriers to be economically significant. Despite an overall downward trend, our measure reveals periods when cross-border funding frictions become more severe. These periods coincide with increases in market segmentation documented in the literature but not explained by the variation in other international investment barriers.