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Capital Market and Business Cycle Volatility

By Piyapas Tharavanij

Abstract

This paper investigates cross-country evidence on how capital markets affect business cycle volatilities. In contrast to the large and growing literature of finance and growth, empirical work on the relationship between finance, particularly capital markets, and volatility has been relatively scarce, though theoretically, more developed capital markets should lead to lower macroeconomic volatilities. Results are generated using panel estimation technique with data from 44 countries covering the years 1975 through 2004. The major finding is that countries with more developed capital markets have smoother economic fluctuations. The results hold under various estimation methods and after controlling for other relevant variables, country specific effects, and plausible endogeneity problems.

Topics: C33 - Models with Panel Data; Longitudinal Data; Spatial Time Series, E44 - Financial Markets and the Macroeconomy, G00 - General, E32 - Business Fluctuations; Cycles, G21 - Banks; Depository Institutions; Micro Finance Institutions; Mortgages
Year: 2007
DOI identifier: 10.2139/ssrn.1015182
OAI identifier: oai:mpra.ub.uni-muenchen.de:5188

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