DEEP FINANCIAL INTEGRATION AND VOLATILITY

We investigate the relationship between financial integration and output volatility at micro and macrolevels. Using a very large firm-level dataset from EU countries over time, we construct a measureof "deep" financial integration at the regional level based on foreign ownership at the firm level. Wefind a positive effect of foreign ownership on volatility of firms' outcomes. This effect survives aggregationand carries over to regional output. Exploiting variation in the transposition dates of EU-wide legislation,we find that high trust regions in countries who harmonized capital markets sooner have higher levelsof financial integration and volatility....