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Capital Market Openness and Output Volatility

Author

Listed:
  • Kwang-Myoung Hwang

    () (Macroeconomics Team, Economic Research Institute, The Bank of Korea)

  • Donghyun Park

    () (Macroeconomics anf Finance Research Division, Economics and Research Department, Asia Development Bank)

  • Kwanho Shian

    () (Department of Economics, Korea University)

Abstract

At a conceptual level, opening of capital markets entails a number of benefits and costs. One major cost of financial openness is output volatility. In this paper, using data from 21 advanced and 81 developing countries during 1971-2010, we empirically examine the impact of capital market openness on output volatility. We find that opening of capital markets increases the output volatility of developing countries. Furthermore, we find that the main channel through which capital market openness increases volatility is currency and external-debt crisis. Finally we find that, while Asian countries are less likely to experience a crisis, they become even more unstable than other developing countries once a crisis occurs. Our evidence strengthens the case for caution in developing countries' opening up of their capital markets.

Suggested Citation

  • Kwang-Myoung Hwang & Donghyun Park & Kwanho Shian, 2013. "Capital Market Openness and Output Volatility," Working Papers 2013-14, Economic Research Institute, Bank of Korea.
  • Handle: RePEc:bok:wpaper:1314
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    References listed on IDEAS

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    Cited by:

    1. Marwân-al-Qays Bousmah & Daria Onori, 2016. "Financial Openness, Aggregate Consumption and Threshold Effects," Pacific Economic Review, Wiley Blackwell, vol. 21(3), pages 358-380, August.
    2. Anne Epaulard & Aude Pommeret, 2016. "Financial Integration, Growth and Volatility," Pacific Economic Review, Wiley Blackwell, vol. 21(3), pages 330-357, August.
    3. Sylvain Leduc & Mark M. Spiegel, 2013. "Is Asia Decoupling from the United States (Again)?," Pacific Economic Review, Wiley Blackwell, vol. 18(3), pages 345-369, August.
    4. Batten, Jonathan A. & Vo, Xuan Vinh, 2015. "Foreign ownership in emerging stock markets," Journal of Multinational Financial Management, Elsevier, vol. 32, pages 15-24.

    More about this item

    Keywords

    Capital market openness; Financial openness; Financial liberalization; Output volatility; Financial crisis;

    JEL classification:

    • F3 - International Economics - - International Finance

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