On the Non-Linear Negative Relationship between Growth and Volatility under International Capital Flows

32 Pages Posted: 16 Oct 2009

See all articles by Xinhua Gu

Xinhua Gu

University of Macau

Baomin Dong

University of International Business and Economics (UIBE)

Date Written: September 21, 2009

Abstract

This paper treats capital flows as risky growth opportunities for both investing and host countries in a standard mean-variance model. Differing optimal tradeoffs between growth and volatility on both sides of capital flows are examined on the basis of their different attitudes toward destabilizing risk, different considerations of capital market openness, and different levels of financial sector development. It is established that growth and volatility may have a positive or a negative relationship in theory, but in practice, they are correlated negatively with each other. This negative correlation is persistently non-linear after some normalization, and significantly holds not only for developing but also for developed countries. The paper explains why one side’s push for financial liberalization comes across the other side’s resistance to it. This conflict of interest can be resolved via negotiations for compromise equilibrium at which each side’s optimal tradeoff is made internationally compatible.

Keywords: Globalization, Financial development, volatility, growth, tradeoffs

JEL Classification: F15, F36, F41, F59

Suggested Citation

Gu, Xinhua and Dong, Baomin, On the Non-Linear Negative Relationship between Growth and Volatility under International Capital Flows (September 21, 2009). Available at SSRN: https://ssrn.com/abstract=1476192 or http://dx.doi.org/10.2139/ssrn.1476192

Xinhua Gu

University of Macau ( email )

FBA, University of Macau, Taipa, Macau
Macau, Macau 10000
China

Baomin Dong (Contact Author)

University of International Business and Economics (UIBE) ( email )

10, Huixin Dongjie
Changyang District
Beijing, Beijing 100029
China

Do you have negative results from your research you’d like to share?

Paper statistics

Downloads
69
Abstract Views
583
Rank
599,109
PlumX Metrics