The Impact of Financial Market Development on Output Volatility: Panel Data Evidence for Asian Countries

Abstract

This research is an endeavor to empirically estimate dynamic
association of output volatility and financial market development
in a balanced panel of selected 22 Asian countries during 1998-
2015, covering annual observations of 18 years. The estimation
strategy used in this research is System GMM. The empirical
results support significant positive impact of financial development
on output volatility in Asia when financial development is captured
through financial depth index. The results are in line with theory
and with experience of cross sections during reference period.
Robust analysis is also carried out by including another financial
development measure i.e. banking stability Z-score and numerical
estimates are found to be strongly robust and consistent. An
important policy implication is that prudent banking regulations
and supervision is needed in Asia to increase financial efficiency
beside excessive financialization.