Distance(S) and the Volatility of International Trade(S)

We show that distance matters for the volatility of international trade and financial transactions beyond its well-known relevance for their levels. We consider alternative measures of distance and estimate their impact on a broad range of trade and financial transactions volatility to test whether distance reflects shipment costs or information frictions. We conduct event studies of two noteworthy volatility episodes (the 2007-09 global financial crisis and the 2020 Covid-19 pandemic outbreak) and a longer panel data analysis. Our results emphasize the relevance of information frictions. The volatility of international trade and finance is not only impacted by physical distance but also by virtual and linguistic distances, which proxy for ease of communication. Interactions matter, with physical distance having a weaker impact between country pairs when virtual distance is low. The effect of distance is also weaker for foreign direct investment and banking activity, which entail local presence, or for trade in homogeneous products, such as commodities, which further points to the importance of information frictions. Finally, the effects of virtual and linguistic distances on trade volatility are weaker in the longer panel analysis than in two event studies, which suggests that they matter especially in unusual crisis times