output volatility at micro and macro levels. Using a very large firm-level dataset (AMADEUS) from 16 European countries, we construct a measure of "deep" financial integration at the regional-level based on observations of foreign ownership at the firm-level. We find a significant positive effect of foreign ownership on the volatility of firms' outcomes, both in static and dynamic empirical frameworks. This effect survives aggregation and carries over to regional output, leading to a positive association between deep financial integration and aggregate fluctuations. We exploit a quasi-natural experiment, Financial Services Action Plan of the European Union (EU), to identify the causal effect of financial integration on volatility. We argue that the regions with higher levels of trust that are located in countries who harmonize their financial policies sooner, will have higher levels of financial integration. We construct a measure of "predicted integration" based on the interaction between the transposition dates of the EU-wide financial policy directives and the regional trust. Using predicted integration as an instrument, we find that financial integration leads to more aggregate volatility.
