Publication: Financial Globalization and Market Volatility: An Empirical Appraisal
Loading...
Date
2017-06
ISSN
Published
2017-06
Author(s)
Editor(s)
Abstract
This paper computes a new financial globalization index for a large sample of countries for 1992-2016. Unlike other measures, the financial globalization index corrects for the heteroscedasticity of global volatility. This leads to a downward adjustment of financial globalization trends for developed, emerging, and frontier markets. The paper also shows that financial globalization reduces market volatility (measured by the volatility of stock returns) in tranquil times, and increases it in turbulent ones. On average, the first effect dominates, so that financial globalization leads to a decrease in market volatility, which is more pronounced in frontier markets.
Link to Data Set
Citation
“Cordella, Tito; Ospino Rojas, Anderson. 2017. Financial Globalization and Market Volatility: An Empirical Appraisal. Policy Research Working Paper;No. 8091. © World Bank. http://hdl.handle.net/10986/27291 License: CC BY 3.0 IGO.”
Associated URLs
Associated content
Other publications in this report series
Publication Intergenerational Income Mobility around the World(Washington, DC: World Bank, 2025-07-09)This paper introduces a new global database with estimates of intergenerational income mobility for 87 countries, covering 84 percent of the world’s population. This marks a notable expansion of the cross-country evidence base on income mobility, particularly among low- and middle-income countries. The estimates indicate that the negative association between income mobility and inequality (known as the Great Gatsby Curve) continues to hold across this wider range of countries. The database also reveals a positive association between income mobility and national income per capita, suggesting that countries achieve higher levels of intergenerational mobility as they grow richer.Publication The Future of Poverty(Washington, DC: World Bank, 2025-07-15)Climate change is increasingly acknowledged as a critical issue with far-reaching socioeconomic implications that extend well beyond environmental concerns. Among the most pressing challenges is its impact on global poverty. This paper projects the potential impacts of unmitigated climate change on global poverty rates between 2023 and 2050. Building on a study that provided a detailed analysis of how temperature changes affect economic productivity, this paper integrates those findings with binned data from 217 countries, sourced from the World Bank’s Poverty and Inequality Platform. By simulating poverty rates and the number of poor under two climate change scenarios, the paper uncovers some alarming trends. One of the primary findings is that the number of people living in extreme poverty worldwide could be nearly doubled due to climate change. In all scenarios, Sub-Saharan Africa is projected to bear the brunt, contributing the largest number of poor people, with estimates ranging between 40.5 million and 73.5 million by 2050. Another significant finding is the disproportionate impact of inequality on poverty. Even small increases in inequality can lead to substantial rises in poverty levels. For instance, if every country’s Gini coefficient increases by just 1 percent between 2022 and 2050, an additional 8.8 million people could be pushed below the international poverty line by 2050. In a more extreme scenario, where every country’s Gini coefficient increases by 10 percent between 2022 and 2050, the number of people falling into poverty could rise by an additional 148.8 million relative to the baseline scenario. These findings underscore the urgent need for comprehensive climate policies that not only mitigate environmental impacts but also address socioeconomic vulnerabilities.Publication Engineering Ukraine’s Wirtschaftswunder(Washington, DC: World Bank, 2025-07-29)As Ukraine emerges from the devastation of war, it faces a historic opportunity to engineer its own Wirtschaftswunder—a productivity-driven economic transformation akin to post-war West Germany. While investment-led growth may offer quick wins, it is efficiency, innovation, and institutional reform that will determine Ukraine’s long-term economic trajectory. Drawing on rich micro-level firm data spanning 25 years, this paper uncovers deep structural distortions that have suppressed creative destruction and productivity in Ukraine. It finds that business dynamism is on the decline, alongside rising market concentration among incumbent businesses, including low productivity state owned enterprises. To inform priorities for reviving business dynamism, this study develops a model of creative destruction drawing on Acemoglu et al. (2018) and Akcigit et al. (2021). The quantitative assessment highlights that policies that discipline entrenched incumbents are the bedrock for reviving business dynamism and engineer Ukraine’s Wirtschaftswunder. Policies targeting specific types of firms have limited efficacy when incumbents run wild.Publication The Macroeconomic Implications of Climate Change Impacts and Adaptation Options(Washington, DC: World Bank, 2025-05-29)Estimating the macroeconomic implications of climate change impacts and adaptation options is a topic of intense research. This paper presents a framework in the World Bank's macrostructural model to assess climate-related damages. This approach has been used in many Country Climate and Development Reports, a World Bank diagnostic that identifies priorities to ensure continued development in spite of climate change and climate policy objectives. The methodology captures a set of impact channels through which climate change affects the economy by (1) connecting a set of biophysical models to the macroeconomic model and (2) exploring a set of development and climate scenarios. The paper summarizes the results for five countries, highlighting the sources and magnitudes of their vulnerability --- with estimated gross domestic product losses in 2050 exceeding 10 percent of gross domestic product in some countries and scenarios, although only a small set of impact channels is included. The paper also presents estimates of the macroeconomic gains from sector-level adaptation interventions, considering their upfront costs and avoided climate impacts and finding significant net gross domestic product gains from adaptation opportunities identified in the Country Climate and Development Reports. Finally, the paper discusses the limits of current modeling approaches, and their complementarity with empirical approaches based on historical data series. The integrated modeling approach proposed in this paper can inform policymakers as they make proactive decisions on climate change adaptation and resilience.Publication Disentangling the Key Economic Channels through Which Infrastructure Affects Jobs(Washington, DC: World Bank, 2025-04-03)This paper takes stock of the literature on infrastructure and jobs published since the early 2000s, using a conceptual framework to identify the key channels through which different types of infrastructure impact jobs. Where relevant, it highlights the different approaches and findings in the cases of energy, digital, and transport infrastructure. Overall, the literature review provides strong evidence of infrastructure’s positive impact on employment, particularly for women. In the case of electricity, this impact arises from freeing time that would otherwise be spent on household tasks. Similarly, digital infrastructure, particularly mobile phone coverage, has demonstrated positive labor market effects, often driven by private sector investments rather than large public expenditures, which are typically required for other large-scale infrastructure projects. The evidence on structural transformation is also positive, with some notable exceptions, such as studies that find no significant impact on structural transformation in rural India in the cases of electricity and roads. Even with better market connections, remote areas may continue to lack economic opportunities, due to the absence of agglomeration economies and complementary inputs such as human capital. Accordingly, reducing transport costs alone may not be sufficient to drive economic transformation in rural areas. The spatial dimension of transformation is particularly relevant for transport, both internationally—by enhancing trade integration—and within countries, where economic development tends to drive firms and jobs toward urban centers, benefitting from economies scale and network effects. Turning to organizational transformation, evidence on skill bias in developing countries is more mixed than in developed countries and may vary considerably by context. Further research, especially on the possible reasons explaining the differences between developed and developing economies, is needed.
Journal
Journal Volume
Journal Issue
Collections
Related items
Showing items related by metadata.
Publication Global Economic Prospects : Financial Market Outlook, July 2013(World Bank, Washington, DC, 2013-07)Global financial markets were largely stable during the past year, not with-standing the recent uptick in volatility amid uncertainty over the timing of an eventual tapering off of quantitative easing. Improved financial conditions are reflected in a strong rebound in gross capital flows (international bond issuance, cross-border syndicated bank loans and new equity placements) to developing countries, which were 63 percent higher in the first five months of 2013 than during the same period in 2012. Foreign direct investment (FDI) inflows to developing countries increased by 9 percent during the first quarter of 2013 on a year-on-year basis, with a mixed picture across countries. Since late May, financial market volatility has increased, with increased expectations about possible tapering of U.S. quantitative easing in coming months and uncertainty over its impacts. Although there have been some large stock market corrections in some Asian countries, so far the overall impact has been moderate. Bond yields on developing country debt are also on the rise as base rates and spreads increase.Publication Global Economic Prospects, June 2012(Washington, DC, 2012-06)The year began on a positive note. A marked improvement in market sentiment, combined with monetary policy easing in developing countries, was reflected in a rebound in economic activity in both developing and advanced countries. Industrial production, trade and capital goods sales all returned to positive territory, following the slow growth of the fourth quarter of 2011. Although debt levels in developing countries are lower, several countries (notably Jordan, India, and Pakistan) must reduce their structural fiscal balances to reduce debt to 40 percent of Gross domestic Product (GDP) by 2020 (or prevent debt-to-GDP ratios from rising further). As a result, sharp swings in investor sentiment and financial conditions will continue to complicate the conduct of macroeconomic policy in developing countries. In these conditions, policy in developing countries needs to be less reactive to short-term changes in external conditions, and more responsive to medium-term domestic considerations. A return to more neutral macroeconomic policies would also help developing countries reduce their vulnerabilities to external shocks, by rebuilding fiscal space, reducing short-term debt exposures and recreating the kinds of buffers that allowed them to react so resiliently to the 2008/09 crisis.Publication Global Economic Prospects : Financial Market Outlook, March 2013(World Bank, Washington, DC, 2013-03)Global financial conditions have improved substantially since July 2012, a reflection of the cumulative steps taken by high-income countries' central banks. Gross capital flows to developing countries, which weakened in mid-2012 due to Euro area turmoil, bounced back in the second half of the year. Foreign direct investment (FDI) inflows to developing countries are expected to have declined slightly in 2012 following increased uncertainty in global financial markets. Gross capital flows have remained strong so far in 2013, with January and February flows 47 percent higher than in the same period in 2012. The level of net capital flows going to developing countries is set to rise through 2015.Publication Financial Distortions and the Distribution of Global Volatility(2012-01-01)Why are emerging economies excessively vulnerable to shocks to external funding? What was the role of financial flows from emerging to developed economies in setting the stage for the subprime crisis? This paper addresses these questions in a simple general equilibrium framework that emphasizes the aggregate implications of the misallocation of funds on the micro level. The analysis shows that the misallocation of funds amplifies volatility even in a closed economy. Financial integration between relatively distorted emerging economies and relatively undistorted developed economies leads to a further divergence in volatility, thereby providing a new and simple explanation for the divergent trends in output volatility up to the recent crisis. In the integrated environment, cheap funding leads to an endogenous deterioration of the financial system in developed economies. These predictions are consistent with a wide variety of microfoundations, in which distortions cause productive projects to be relatively more sensitive to aggregate shocks. The paper provides some empirical evidence for these microfoundations.Publication Global Economic Prospects : Financial Markets Outlook, June 2014(World Bank Group, Washington, DC, 2014-06)External financing conditions for developing countries have been remarkably favorable in recent months, reflecting expectations of a more drawn-out period of monetary policy accommodation in high-income countries and some narrowing of external vulnerabilities. Additional easing by the European Central Bank, combined with prospects of modest growth and stable inflation in the United States ( Goldilocks recovery ), helped pull down bond yields and volatility worldwide. These benign conditions currently provide support to capital inflows and activity across developing countries, but could at the same time increase the risk of greater and potentially more abrupt market adjustments ahead. Despite some reduction of current account deficits in several developing countries, many remain vulnerable to sudden shifts in investors sentiment and capital outflows. Following a brief period of market turmoil at the start of the year, global financing conditions have eased consider-ably from March to June. Bond spreads for developing countries (i.e. yield difference with 10-year U.S. Treasury bonds) have narrowed, bringing down average borrowing costs to their lowest level since the spring of 2013. Stock markets have also recovered rapidly from a significant sell-off in January/February, despite rising geopolitical tensions and evidence of disappointing activity in the first quarter of the year. As presented in the June 2014 edition of Global Economic Prospects, a more favorable global environment is reflected in upward revisions to capital inflow forecasts for developing countries, now projected to remain broad-ly stable as a percentage of GDP in 2014 and 2015, at around 5.6 percent, before declining again in 2016, to 5.1 percent. While baseline forecasts assume an orderly in-crease in long-term interest rates in high-income countries, the risk of more abrupt adjustments from current low levels has recently increased. Escalating geopolitical tensions or financial stress in some developing countries could also potentially trigger a sudden re-pricing of risk. Despite the recent narrowing of current account deficits in some developing countries, many remain vulnerable to a sharp increase in borrowing costs and/or significant currency depreciations, which could put additional strain on corporate and bank balance sheets.
Users also downloaded
Showing related downloaded files
Publication Digital Progress and Trends Report 2023(Washington, DC: World Bank, 2024-03-05)Digitalization is the transformational opportunity of our time. The digital sector has become a powerhouse of innovation, economic growth, and job creation. Value added in the IT services sector grew at 8 percent annually during 2000–22, nearly twice as fast as the global economy. Employment growth in IT services reached 7 percent annually, six times higher than total employment growth. The diffusion and adoption of digital technologies are just as critical as their invention. Digital uptake has accelerated since the COVID-19 pandemic, with 1.5 billion new internet users added from 2018 to 2022. The share of firms investing in digital solutions around the world has more than doubled from 2020 to 2022. Low-income countries, vulnerable populations, and small firms, however, have been falling behind, while transformative digital innovations such as artificial intelligence (AI) have been accelerating in higher-income countries. Although more than 90 percent of the population in high-income countries was online in 2022, only one in four people in low-income countries used the internet, and the speed of their connection was typically only a small fraction of that in wealthier countries. As businesses in technologically advanced countries integrate generative AI into their products and services, less than half of the businesses in many low- and middle-income countries have an internet connection. The growing digital divide is exacerbating the poverty and productivity gaps between richer and poorer economies. The Digital Progress and Trends Report series will track global digitalization progress and highlight policy trends, debates, and implications for low- and middle-income countries. The series adds to the global efforts to study the progress and trends of digitalization in two main ways: · By compiling, curating, and analyzing data from diverse sources to present a comprehensive picture of digitalization in low- and middle-income countries, including in-depth analyses on understudied topics. · By developing insights on policy opportunities, challenges, and debates and reflecting the perspectives of various stakeholders and the World Bank’s operational experiences. This report, the first in the series, aims to inform evidence-based policy making and motivate action among internal and external audiences and stakeholders. The report will bring global attention to high-performing countries that have valuable experience to share as well as to areas where efforts will need to be redoubled.Publication Global Economic Prospects, January 2025(Washington, DC: World Bank, 2025-01-16)Global growth is expected to hold steady at 2.7 percent in 2025-26. However, the global economy appears to be settling at a low growth rate that will be insufficient to foster sustained economic development—with the possibility of further headwinds from heightened policy uncertainty and adverse trade policy shifts, geopolitical tensions, persistent inflation, and climate-related natural disasters. Against this backdrop, emerging market and developing economies are set to enter the second quarter of the twenty-first century with per capita incomes on a trajectory that implies substantially slower catch-up toward advanced-economy living standards than they previously experienced. Without course corrections, most low-income countries are unlikely to graduate to middle-income status by the middle of the century. Policy action at both global and national levels is needed to foster a more favorable external environment, enhance macroeconomic stability, reduce structural constraints, address the effects of climate change, and thus accelerate long-term growth and development.Publication Is US Trade Policy Reshaping Global Supply Chains ?(World Bank, Washington, DC, 2023-11-01)This paper examines the reshaping of supply chains using detailed US 10-digit import data (tariff-line level) between 2017 and 2022. The results show that while US-China decoupling in bilateral trade is real, supply chains remain intertwined with China. Over the period, China’s share of US imports fell from 22 to 16 percent. The paper shows that the decline is due to US tariffs. US imports from China are being replaced with imports from large developing countries with revealed comparative advantage in a product. Countries replacing China tend to be deeply integrated into China’s supply chains and are experiencing faster import growth from China, especially in strategic industries. Put differently, to displace China on the export side, countries must embrace China’s supply chains. Within products, the reorientation of trade is consistent with a “China + 1” strategy, as opposed to diversified sourcing across multiple countries. There is some evidence of nearshoring, but it is exclusive to border nations, and there is no consistent evidence of reshoring. Despite the significant reshaping, China remained the top supplier of imported goods to the US in 2022.Publication Global Economic Prospects, June 2024(Washington, DC: World Bank, 2024-06-11)After several years of negative shocks, global growth is expected to hold steady in 2024 and then edge up in the next couple of years, in part aided by cautious monetary policy easing as inflation gradually declines. However, economic prospects are envisaged to remain tepid, especially in the most vulnerable countries. Risks to the outlook, while more balanced, are still tilted to the downside, including the possibility of escalating geopolitical tensions, further trade fragmentation, and higher-for-longer interest rates. Natural disasters related to climate change could also hinder activity. Subdued growth prospects across many emerging market and developing economies and continued risks underscore the need for decisive policy action at the global and national levels. Global Economic Prospects is a World Bank Group Flagship Report that examines global economic developments and prospects, with a special focus on emerging market and developing economies, on a semiannual basis (in January and June). Each edition includes analytical pieces on topical policy challenges faced by these economies.Publication Business Ready 2024(Washington, DC: World Bank, 2024-10-03)Business Ready (B-READY) is a new World Bank Group corporate flagship report that evaluates the business and investment climate worldwide. It replaces and improves upon the Doing Business project. B-READY provides a comprehensive data set and description of the factors that strengthen the private sector, not only by advancing the interests of individual firms but also by elevating the interests of workers, consumers, potential new enterprises, and the natural environment. This 2024 report introduces a new analytical framework that benchmarks economies based on three pillars: Regulatory Framework, Public Services, and Operational Efficiency. The analysis centers on 10 topics essential for private sector development that correspond to various stages of the life cycle of a firm. The report also offers insights into three cross-cutting themes that are relevant for modern economies: digital adoption, environmental sustainability, and gender. B-READY draws on a robust data collection process that includes specially tailored expert questionnaires and firm-level surveys. The 2024 report, which covers 50 economies, serves as the first in a series that will expand in geographical coverage and refine its methodology over time, supporting reform advocacy, policy guidance, and further analysis and research.