Does the Institutionalization of Derivatives Trading Spur Economic Growth?

29 Pages Posted: 4 Mar 2012 Last revised: 25 Jan 2013

See all articles by Paulo Rodrigues

Paulo Rodrigues

Maastricht University - Department of Finance

Claudia Schwarz

European Central Bank (ECB)

Norman Seeger

VU University Amsterdam

Date Written: February 15, 2012

Abstract

It is a widespread view that derivatives played a crucial role during the recent financial and economic crisis. This opinion manifested in headlines such as “Why Derivatives Caused Financial Crisis” and derivatives have been termed “Financial Weapons of Mass Destruction”. However, the analysis of the role of derivatives in the economy requires a much more differentiated discussion as the statements given above imply. In this paper we analyze the effect of institutionalization of derivatives trading on economic growth and economic growth volatility; measuring growth in GDP per capita. The relationship between the institutionalization of derivatives trading and economic growth is investigated by using a panel data set comprising of 45 countries observed over 39 years.

Our results show a statistically and economically significant positive effect of the establishment and existence of a domestic derivatives exchange on economic growth. These results are robust to different model specifications and to controlling for financial reforms. The effect of institutionalized derivatives trading on growth volatility is analyzed by means of an EGARCH model and is found to be negative and significant.

Keywords: Economic growth, derivatives exchanges, empirical analysis, GMM estimation

JEL Classification: G10, G20, C33, O16

Suggested Citation

Rodrigues, Paulo and Schwarz, Claudia and Seeger, Norman, Does the Institutionalization of Derivatives Trading Spur Economic Growth? (February 15, 2012). Available at SSRN: https://ssrn.com/abstract=2014805 or http://dx.doi.org/10.2139/ssrn.2014805

Paulo Rodrigues

Maastricht University - Department of Finance ( email )

Maastricht, 6200 MD
Netherlands

Claudia Schwarz (Contact Author)

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Norman Seeger

VU University Amsterdam ( email )

De Boelelaan 1105
Amsterdam, 1081 HV
Netherlands
+31 20 598 1512 (Phone)

HOME PAGE: http://www.norman-seeger.com

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