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Deep Financial Integration and Volatility

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  • Vadym Volosovych

    (lorida Atlantic University)

  • Bent E. Sørensen

    (University of Houston)

  • Sebnem Kalemli-Ozcan

    (University of Houston)

Abstract

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, both in static and 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. We exploit a quasi-natural experiment, Financial Services Action Plan of the European Union (EU), to identify the causal effect of financial integration on volatility. We argue that the regions with higher levels of trust that are located in countries who harmonize their financial policies sooner, will have higher levels of financial integration. We construct a measure of "predicted integration" based on the interaction between the transposition dates of the EU-wide financial policy directives and the regional trust. Using predicted integration as an instrument, we find that financial integration leads to more aggregate volatility.

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Bibliographic Info

Paper provided by Society for Economic Dynamics in its series 2010 Meeting Papers with number 232.

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Date of creation: 2010
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Handle: RePEc:red:sed010:232

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References

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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. 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.
  3. Vasco Carvalho & Xavier Gabaix, 2013. "The Great Diversification and Its Undoing," American Economic Review, American Economic Association, vol. 103(5), pages 1697-1727, August.
  4. Gianni De Nicolò & Luciana Juvenal, 2012. "Financial Integration, Globalization, and Real Activity," CESifo Working Paper Series 3737, CESifo Group Munich.

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