Capital Market Openness and Output Volatility

44 Pages Posted: 20 Mar 2015

See all articles by Kwang‐Myoung Hwang

Kwang‐Myoung Hwang

The Bank of Korea

Donghyun Park

Asian Development Bank - Economic Research

Kwanho Shin

Korea University

Date Written: May 3, 2013

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.

Keywords: Capital market openness, Financial openness, Financial liberalization, Output volatility, Financial crisis

JEL Classification: F32, F21, F43, F41, G01

Suggested Citation

Hwang, Kwang‐Myoung and Park, Donghyun and Shin, Kwanho, Capital Market Openness and Output Volatility (May 3, 2013). Bank of Korea WP 2013-14, Available at SSRN: https://ssrn.com/abstract=2579529 or http://dx.doi.org/10.2139/ssrn.2579529

Kwang‐Myoung Hwang (Contact Author)

The Bank of Korea ( email )

39, Namdaemun-ro, Jung-gu
Seoul, 04531
Korea, Republic of (South Korea)

Donghyun Park

Asian Development Bank - Economic Research ( email )

6 ADB Avenue, Mandaluyong City 1550
Metro Manila
Philippines

Kwanho Shin

Korea University ( email )

1 Anam-dong 5 ka
Sunbuk-Ku, Department of Economics
Seoul 136-701
Korea
82-2-3290-2220 (Phone)
82-2-3290-2719 (Fax)

HOME PAGE: econ.korea.ac.kr/~khshin

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