My dissertation consists of three essays in international capital markets. In Chapter I, weexamine the herd trading behavior of institutional investors trading around the world. Usinga new transaction-level trades database of 531 U.S. institutional investors trading across37 countries for the period 2002-2009, we find robust evidence of intra- and inter-periodherdings at the monthly frequency. We find no evidence that trades by institutions in oursample destabilize local stock markets. Further analysis shows that: (i) in the buy side, bothintra- and inter-period herdings are more pronounced in countries with weaker informationenvironments; and (ii) in the sell side, intra-period herding is more pronounced in countrieswith stronger information environments, whereas inter-period herding is not significantlyrelated to information environments.In Chapter II, we document that the degree of co-movement between bilateral USD ex-change rates has increased substantially since the introduction of the euro in 1999 andinvestigate what drives the increased co-movement. For each of our 33 sampled bilateralUSD exchange rates, we measure the degree of co-movement using the R-square from re-gressing weekly exchange rate changes on the weekly world exchange rate factor. Our resultsshow that, for the majority of sample exchange rates, the R-square has increased substan-tially over the period 1999-2010. Specifically, the average R-square was 0.15 in 1999, butit increased to 0.47 by more than 200% in 2010. Further analysis reveals that the risinginfluence of the euro relative to USD over a third currency can explain most of the increasein the measured co-movement over time.In Chapter III, we examine the level and trend of U.S. domestic market integration. Foreach of our sample states, we construct the state (market) portfolio comprising public firmsheadquartered within the state and compute R-square, our measure of integration, fromregressing state portfolio returns on national stock market factors. Using weekly returns,we estimate the regression for each year of our sample period 1963-2008. The key findingsare: (i) For the majority of sample states, the R-square exhibits a statistically significantupward trend, implying that U.S. domestic stock markets were not fully integrated andhave been integrating during the sample period; (ii) consistent with the previous result, theexplanatory power of the state factor over individual stock returns has been decreasing forthe majority of states; and (iii) the increasing integration of U.S. domestic stock markets isassociated with the decreasing home state bias, suggesting that investors' pursuit of nation-wide investment opportunities may be a significant driver of domestic financial integration.
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