Financial globalization and stock market risk

This paper examines stock market volatility measured by either “beta-volatility” or by the standard deviation of stock returns over 1995–2007. In our dynamic panel data framework, after controlling for size, turnover, and real output growth, we find some support to increases in financial integration reducing total stock return volatility for representative emerging markets, with almost no impact for industrial economies. Allowing for feedback effects from stock volatility to stock turnover, we obtain a richer interpretation for the broadening of investor basis hypothesis: more integrated financial markets leads to lower stock volatility, yet these are not so strong as found previously and are not accompanied by more turnover.

► Our results suggest that financial integration reduces stock return volatility.
► These results are robust to control variables (size, turnover, and real output).
► In our dynamic panels, the reduction in risk is not so strong as previously found.
► The decrease in stock market risk is not accompanied by more turnover.