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Deep Financial Integration and Volatility

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  • Sebnem Kalemli-Ozcan

    ()
    (University of Houston and NBER)

  • Bent E. Sørensen
  • Vadym Volosovych

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 financial integration and aggregate fluctuations. To identify the causal effect of financial 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 increased levels of financial integration and volatility.

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File URL: http://eaf.ku.edu.tr/sites/eaf.ku.edu.tr/files/erf_wp_1006.pdf
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Bibliographic Info

Paper provided by Koc University-TUSIAD Economic Research Forum in its series Koç University-TUSIAD Economic Research Forum Working Papers with number 1006.

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Length: 73 pages
Date of creation: Feb 2010
Date of revision: Apr 2010
Handle: RePEc:koc:wpaper:1006

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

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Citations

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Cited by:
  1. Sebnem Kalemli-Ozcan & Bent Sorensen & Sevcan Yesiltas, 2011. "Leverage Across Firms, Banks, and Countries," NBER Working Papers 17354, National Bureau of Economic Research, Inc.
  2. Vasco Carvalho & Xavier Gabaix, 2010. "The great diversification and its undoing," Economics Working Papers 1208, Department of Economics and Business, Universitat Pompeu Fabra, revised Oct 2010.
  3. De Nicolò, Gianni & Juvenal, Luciana, 2014. "Financial integration, globalization, and real activity," Journal of Financial Stability, Elsevier, vol. 10(C), pages 65-75.
  4. Markus Leibrecht & Johann Scharler, 2012. "Government Size and Business Cycle Volatility; How Important Are Credit Constraints?," Working Papers 2012-04, Faculty of Economics and Statistics, University of Innsbruck.
  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. Kalemli-Ozcan, Sebnem & Papaioannou, Elias & Peydró, José-Luis, 2010. "Financial regulation, financial globalization and the synchronization of economic activity," Working Paper Series 1221, European Central Bank.
  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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