The network of international capital markets is modeled as a global communications system, where information flows in one channel and funds flow in the other. Based on the fundamental logic of the measurement of information (Reza, 1992) and on the standard assumptions of the Capital Asset Pricing Model (CAPM) (Shapiro, 1999), we demonstrate that these markets operate at very large losses. Global markets are far less efficient than long-established domestic capital markets of developed countries, which do relatively well in transmitting information and funds. Along with the integration of national capital markets into a more tightly knit international network, however, major improvements in efficiency can be expected. Integration, though, implies a need for some kind of global regulations to help standardize the flow of information and the routines of pricing risk. Standardization in turn can be expected to decrease risks and increase the efficiency of distributing funds. From an information-theoretical perspective the introduction of mutually accepted regulations is desired, since it would boost the capacity utilization of the distribution system as such. A better-utilized communications system will bring faster clearing international markets and cheaper funds.
Lucas, R. E. (1992): Studies in Business Cycle. Cambridge, Mass.: MIT Press.