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Does Financial Integration Reduce Output Volatility? New Evidence from Cross‐Country Data
Author(s) -
Sahoo Pradipta Kumar,
Tripati Rao D.,
Rath Badri Narayan
Publication year - 2019
Publication title -
economic papers: a journal of applied economics and policy
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.245
H-Index - 19
eISSN - 1759-3441
pISSN - 0812-0439
DOI - 10.1111/1759-3441.12235
Subject(s) - volatility (finance) , foreign direct investment , economics , financial integration , monetary economics , equity (law) , portfolio investment , panel data , volatility swap , portfolio , international economics , volatility risk premium , volatility smile , macroeconomics , finance , implied volatility , econometrics , financial market , political science , law
We examine the effect of financial integration, measured based on both volume and equity, on output volatility using five‐year non‐overlapping annual average data windows for sixty countries over the 1971–2015 period. We construct aggregate‐ as well as sub‐panels based on income and region. Financial integration reduces output volatility in aggregate and income panel, but not in all regions. Foreign direct investment ( FDI ) and foreign portfolio investment ( FPI ) reduces output volatility in developed countries, but only FDI reduces output volatility in developing countries. Financial regulatory architecture should aim at attracting FDI and macroeconomic and structural reforms to reap the benefits of FPI flows.