Market Integration and Global Crashes

40 Pages Posted: 30 Aug 2016

See all articles by Semyon Malamud

Semyon Malamud

Ecole Polytechnique Federale de Lausanne; Centre for Economic Policy Research (CEPR); Swiss Finance Institute

Aytek Malkhozov

Board of Governors of the Federal Reserve System

Multiple version iconThere are 2 versions of this paper

Date Written: August 2016

Abstract

We develop an equilibrium model of real and financial market integration in which real firms and financial actors independently decide on their investment into different locations (countries). We show that, in the presence of financial frictions, firms' real investment choices may become strategic complements, leading to multiple, self-fulfilling equilibria, as well as to real fragility, whereby a small change in one country's fundamentals triggers a large large change in real investment everywhere. This fragility may lead to a global crash in which severe underinvestment into countries with under-developed financial markets spills over all other countries. We show that such global crashes are particularly severe when frictions are sufficiently symmetric across countries. By contrast, with enough asymmetry, the economy is likely to end up in a local crash equilibrium in which countries with low real investment barriers suffer the most.

Keywords: Crashes, Crises, Financial Frictions, market integration

JEL Classification: F36, F62, F65, G01, G12

Suggested Citation

Malamud, Semyon and Malkhozov, Aytek, Market Integration and Global Crashes (August 2016). CEPR Discussion Paper No. DP11468, Available at SSRN: https://ssrn.com/abstract=2831972

Semyon Malamud (Contact Author)

Ecole Polytechnique Federale de Lausanne ( email )

Lausanne, 1015
Switzerland

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Swiss Finance Institute

c/o University of Geneva
40, Bd du Pont-d'Arve
CH-1211 Geneva 4
Switzerland

Aytek Malkhozov

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
0
Abstract Views
292
PlumX Metrics