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The Impact of the New Financial Products on the Volatility of the Economic Growth

Listed author(s):
  • Albulescu Claudiu Tiberiu

The derivative financial products, the result of the financial innovation process undertaken during the last decades, have a priori an important role in the continuous financing of the economy and in the diversification of the risks. Consequently, these financial instruments have to enable, beyond their speculative character, a reduction of the volatility of the economic and financial activity. Looking at derivatives from the perspective of physiology rather than pathology, we have analyzed the impact the use of these products has upon the economic volatility in four European countries whose financial markets are members of the Euronext stock-exchange market and we discovered a positive relationship between the amount of the transactioned contracts and the reduction of the volatility of the macroeconomic activity. We have previously calculated the reduction of the volatility of the economic activity in the analyzed countries in the period 1988-2006, based on two different methods-the evolution of the standard deviation and the evolution of the contribution of the components to the volatility of an aggregate. The contributions of this article are, on one hand, the use of a more detailed analysis method for the reduction of the volatility, and, on the other hand, the testing of the relationship between the volatility of the real GDP, investments and commercial exchanges and the use of the derivative products. The results have to be interpreted with caution due to the assumptions taken into consideration because of the lack of complex statistic data.

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Article provided by Spiru Haret University, Faculty of Financial Management and Accounting Craiova in its journal Journal of Applied Economic Sciences.

Volume (Year): 2 (2007)
Issue (Month): 1(2)_Fall2007 ()
Pages:

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Handle: RePEc:ush:jaessh:v:2:y:2007:i:1(2)_fall2007:1
Contact details of provider: Web page: http://www2.spiruharet.ro/facultati/facultate.php?id=14

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  1. Urban J. Jermann & Vincenzo Quadrini, 2006. "Financial innovations and macroeconomic volatility," Proceedings, Federal Reserve Bank of San Francisco, issue Nov.
  2. Rose, Andrew K. & Spiegel, Mark M., 2009. "International financial remoteness and macroeconomic volatility," Journal of Development Economics, Elsevier, vol. 89(2), pages 250-257, July.
  3. Dynan, Karen E. & Elmendorf, Douglas W. & Sichel, Daniel E., 2006. "Can financial innovation help to explain the reduced volatility of economic activity?," Journal of Monetary Economics, Elsevier, vol. 53(1), pages 123-150, January.
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  7. Christopher Kent & Kylie Smith & James Holloway, 2005. "Declining Output Volatility: What Role for Structural Change?," RBA Annual Conference Volume, in: Christopher Kent & David Norman (ed.), The Changing Nature of the Business Cycle Reserve Bank of Australia.
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  9. Olivier Blanchard & John Simon, 2001. "The Long and Large Decline in U.S. Output Volatility," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 32(1), pages 135-174.
  10. Wachter, Jessica A., 2006. "Comment on: "Can financial innovation help to explain the reduced volatility of economic activity?"," Journal of Monetary Economics, Elsevier, vol. 53(1), pages 151-154, January.
  11. Robert J Gordon, 2005. "What Caused the Decline in US Business Cycle Volatility?," RBA Annual Conference Volume,in: Christopher Kent & David Norman (ed.), The Changing Nature of the Business Cycle Reserve Bank of Australia.
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  13. Vinhas de Souza, Lúcio, 2004. "Financial Liberalization and Business Cycles: The Experience of Countries in the Baltics and Central Eastern Europe," Discussion Paper Series 1: Economic Studies 2004,23, Deutsche Bundesbank, Research Centre.
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