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Deep Financial Integration and Volatility

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  • Kalemli-Ozcan, Sebnem
  • Sorensen, Bent E
  • Volosovych, Vadym

Abstract

We investigate the relationship between financial integration and output volatility at micro and macro levels. Using a very large firm-level dataset (AMADEUS) from 16 European countries, we construct a measure of ``deep'' financial integration at the regional level based on observations of foreign ownership at the firm level. We find a significant positive effect of foreign ownership on the volatility of firms' outcomes in static as well as dynamic empirical frameworks. This effect survives aggregation and carries over to regional output, leading to a positive association between deep international financial integration and aggregate fluctuations. To identify the causal effect of integration on volatility we exploit variation in the transposition dates of the European Union-wide legislative acts from the Financial Services Action Plan (FSAP). We find that high trust regions located in countries who harmonized their capital markets sooner have higher levels of financial integration and higher volatility.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 7784.

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Date of creation: Apr 2010
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Handle: RePEc:cpr:ceprdp:7784

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Keywords: firm volatility; foreign ownership; macro volatility; regional integration; social capital;

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References

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Citations

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Cited by:
  1. Kalemli-Ozcan, Sebnem & Sørensen, Bent E & Yesiltas, Sevcan, 2011. "Leverage Across Firms, Banks and Countries," CEPR Discussion Papers 8549, C.E.P.R. Discussion Papers.
  2. Carvalho, Vasco M & Gabaix, Xavier, 2010. "The Great Diversification and its Undoing," CEPR Discussion Papers 8044, C.E.P.R. Discussion Papers.
  3. Sebnem Kalemli-Ozcan & Elias Papaioannou & José Luis Peydró, 2009. "Financial Regulation, Financial Globalization and the Synchronization of Economic Activity," NBER Working Papers 14887, National Bureau of Economic Research, Inc.
  4. De Nicolò, Gianni & Juvenal, Luciana, 2014. "Financial integration, globalization, and real activity," Journal of Financial Stability, Elsevier, vol. 10(C), pages 65-75.
  5. Federico, Pablo & Vegh, Carlos A. & Vuletin, Guillermo, 2013. "The effect of capital flows composition on output volatility," Policy Research Working Paper Series 6386, The World Bank.
  6. Markus Leibrecht & Johann Scharler, 2012. "Government Size and Business Cycle Volatility; How Important Are Credit Constraints?," Working Paper Series in Economics 237, University of Lüneburg, Institute of Economics.
  7. Eller, Markus & Fidrmuc, Jarko & Fungácová , Zuzana, 2013. "Fiscal policy and regional output volatility: Evidence from Russia," BOFIT Discussion Papers 13/2013, Bank of Finland, Institute for Economies in Transition.

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