Domestically, financial liberalisation and deregulation have relaxed investment restrictions. More flexible exchange rate policies, liberalisation of capital accounts, the opening of domestic stock markets to foreign investors as well as “investor-friendly” policies help to attract foreign investors. Global factors have also played a role, with the abundant global liquidity environment as well as the decrease in home bias. By way of example, non-residents currently hold 46% of French market capitalisation and slightly more than 50% of French government bonds. BIS Review 140/2007  1  A third driver is the emergence of global financial players, such as large banks, hedge funds, private equity funds and more recently sovereign wealth funds. They all share common characteristics: -  They play an important role in fostering market efficiency, and provide liquidity to capital markets;  -  They use sophisticated investment strategies;  -  They implement advanced risk management practices, and help to spread them across markets and countries. However, because of their sheer size and potential impact on market equilibria, they raise some concerns of transparency as well as questions about their role in fostering, or not, financial stability. Those issues warrant being debated. What are the consequences of the financial globalisation currently underway for global capital markets? They are well known, so I will just highlight two of them. First, globalisation increases the efficiency of financial markets. Thanks to financial globalisation and technological progress, informational efficiency of capital markets has increased over the past few decades.

Any new available information is accurately processed and impounded in asset prices, leading to more accurate pricing of assets and risks. And the permanent quest for arbitrage opportunities has fostered crossmarket and cross-border strategies also leading to more consistent pricing. Allocative efficiency, that is the market’s ability to allocate resources in a way that maximises the welfare attained through their use, has also improved: for a given investor, there is a wider and more diversified range of investment opportunities than ever before. Operational efficiency has so far gained from globalisation, since the cost of financial operations has quickly fallen, due to productivity gains in the financial sector stemming from the scale and scope of economies and the intense competition between markets and intermediaries. Nevertheless, this overall trend towards efficiency occasionally bumps into puzzles that are not readily explained by economic theory. For instance, the longstanding question as to why capital does not flow, in net terms, from rich to poor countries has not yet been clarified since it was first addressed by Robert Lucas. It has recently been supplemented by the so-called “allocation puzzle”, highlighting the fact that capital seems to flow toward economies with relatively low investment rates. Convincing explanations for these puzzles certainly require taking into account market imperfections (such as credit constraints), differences in financial infrastructures as well as growth externalities (such as human capital). Another salient feature of financial globalisation is the rapid maturing of emerging economies and markets.