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Market Integration and Global Crashes

Author

Listed:
  • Semyon Malamud

    (Ecole Polytechnique Federale de Lausanne, Swiss Finance Institute, and Centre for Economic Policy Research (CEPR))

  • Aytek Malkhozov

    (Board of Governors of the Federal Reserve System)

Abstract

We develop an equilibrium model of real and financial market integration in which real firms and financial investors independently decide on their investment into different locations (countries). We show that, in the presence financial frictions, firms' real investment choices become strategic complements, leading to multiple, self-fulfilling equilibria. This fragility may lead to a global crash in which severe underinvestment into countries with under-developed financial markets spills over to countries connected to them by real investment linkages. We show that such global crashes are particularly severe when frictions are sufficiently symmetric across countries. By contrast, with enough asymmetry, the economy is likely to end up in a local crash equilibrium in which countries with low real investment barriers suffer the most.

Suggested Citation

  • Semyon Malamud & Aytek Malkhozov, 2016. "Market Integration and Global Crashes," Swiss Finance Institute Research Paper Series 16-49, Swiss Finance Institute.
    • Handle: RePEc:chf:rpseri:rp1649
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    File URL: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2814012
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    Cited by:

    1. Phelan, Gregory & Toda, Alexis Akira, 2019. "Securitized markets, international capital flows, and global welfare," Journal of Financial Economics, Elsevier, vol. 131(3), pages 571-592.

    More about this item

    Keywords

    Market Integration; Foreign Direct Investment; Frictions; Fragility; Crashes; Crises;
    All these keywords.

    JEL classification:

    • G01 - Financial Economics - - General - - - Financial Crises
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • F62 - International Economics - - Economic Impacts of Globalization - - - Macroeconomic Impacts
    • F65 - International Economics - - Economic Impacts of Globalization - - - Finance
    • F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration

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