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Deep Financial Integration And Volatility

Author

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  • Sebnem Kalemli-Ozcan
  • Bent Sorensen
  • Vadym Volosovych

Abstract

We investigate the relationship between foreign direct ownership of firms and firm- and region-level output volatility using a novel panel data set for European countries. We document a positive, highly robust, relationship between firm-level foreign ownership and volatility of value added. This relationship holds cross-sectionally and in panels with firm fixed effects where the relationship captures within-firm variation over time. Considering domestic firms with assets in foreign countries, we document that it is international diversification, rather than the nationality of the owner, that explains this positive correlation. Our results can also be found at the aggregate level, where we show that region-level volatility is correlated positively with foreign investment in the region. We show that this positive relation between aggregate volatility and foreign investment can be explained by the granularity of the firm size distribution and the fact that foreign ownership is concentrated among the largest firms.

Suggested Citation

  • Sebnem Kalemli-Ozcan & Bent Sorensen & Vadym Volosovych, 2014. "Deep Financial Integration And Volatility," Journal of the European Economic Association, European Economic Association, vol. 12(6), pages 1558-1585, December.
  • Handle: RePEc:bla:jeurec:v:12:y:2014:i:6:p:1558-1585
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    File URL: http://hdl.handle.net/10.1111/jeea.12089
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    3. Pablo Federico, Carlos Vegh, Guillermo Vuletin, 2018. "The effect of capital-flows composition on output volatility," Económica, Departamento de Economía, Facultad de Ciencias Económicas, Universidad Nacional de La Plata, vol. 64, pages 95-132, January-D.
    4. David Thesmar & Mathias Thoenig, 2011. "Contrasting Trends in Firm Volatility," American Economic Journal: Macroeconomics, American Economic Association, vol. 3(4), pages 143-180, October.
    5. Vasco Carvalho & Xavier Gabaix, 2013. "The Great Diversification and Its Undoing," American Economic Review, American Economic Association, vol. 103(5), pages 1697-1727, August.
    6. Kurz, Christopher & Senses, Mine Z., 2016. "Importing, exporting, and firm-level employment volatility," Journal of International Economics, Elsevier, vol. 98(C), pages 160-175.
    7. Kalemli-Ozcan, Sebnem & Sorensen, Bent & Yesiltas, Sevcan, 2012. "Leverage across firms, banks, and countries," Journal of International Economics, Elsevier, vol. 88(2), pages 284-298.
    8. Jarko Fidrmuc & Johann Scharler, 2013. "Financial development and the magnitude of business cycle fluctuations in OECD countries," Applied Economics Letters, Taylor & Francis Journals, vol. 20(6), pages 530-533, April.
    9. De Nicolò, Gianni & Juvenal, Luciana, 2014. "Financial integration, globalization, and real activity," Journal of Financial Stability, Elsevier, vol. 10(C), pages 65-75.
    10. Pejman Abedifar & Iftekhar Hasan & Amine Tarazi, 2014. "Finance-Growth Nexus and Dual Banking System: Relative Importance of Islamic Banks," Working Papers hal-01065676, HAL.
    11. Markus Eller & Jarko Fidrmuc & Zuzana Fungáčová, 2016. "Fiscal Policy and Regional Output Volatility: Evidence from Russia," Regional Studies, Taylor & Francis Journals, vol. 50(11), pages 1849-1862, November.
    12. Norbert Czinkán, 2017. "The Role of Individual Firms in Aggregate Fluctuations: Evidence from Hungary," Financial and Economic Review, Magyar Nemzeti Bank (Central Bank of Hungary), vol. 16(2), pages 40-63.
    13. Maria Bas & Pamela Bombarda & Sébastien Jean & Gianluca Orefice, 2018. "Firms' Exports, Volatility and Skills: Evidence from France," Working Papers 2018-20, CEPII research center.
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    More about this item

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • F15 - International Economics - - Trade - - - Economic Integration
    • F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration
    • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance

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