Finance and diversification

Arbeitspapier

We study how financial market efficiency affects a measure of diversification of output across industrial sectors borrowed from the portfolio allocation literature. Using data on sector-level value added for a wide cross section of countries and for various levels of disaggregation, we construct a benchmark measure of diversification as the set of allocations of aggregate output across industrial sectors which minimize the economy’s long-term volatility for a given level of long-term growth. We find that financial markets increase substantially the speed with which the observed sectoral allocation of output converges towards the optimally diversified benchmark. Convergence to the optimal shares of aggregate output is relatively faster for sectors that have a higher "natural" long-term risk-adjusted growth and which exhibit higher information frictions. Our results are robust to using various proxies for financial development, to accounting for the endogeneity of finance, and to controlling for investor’s protection, contract enforcement, and barriers to entry. Crucially, the observed patterns disappear when we employ "naive" measures of diversification based on the equal spreading of output across sectors.

Angaben zum Objekt

• Sprache: Englisch

Verweise und Beziehungen

• Erschienen in: Series: ECB Working Paper ; No. 1259

Klassifikation und Themen

• Klassifikation: Wirtschaft ; Business Fluctuations; Cycles ; Financial Markets and the Macroeconomy ; Portfolio Choice; Investment Decisions ; Economic Development: Financial Markets; Saving and Capital Investment; Corporate Finance and Governance
• Thema: diversification ; Financial Development ; Growth ; Mean-variance efficiency ; Volatility ; Finanzmarkt ; Effizienzmarkthypothese ; Diversifikation ; Wirtschaftswachstum ; Volatilität ; OECD-Staaten

Beteiligte, Orts- und Zeitangaben

• Ereignis: Geistige Schöpfung
• (wer): Manganelli, Simone ; Popov, Alexander
• Ereignis: Veröffentlichung
• (wer): European Central Bank (ECB)
• (wo): Frankfurt a. M.
• (wann): 2010

Weitere Informationen

• Handle: http://hdl.handle.net/10419/153693
• Letzte Aktualisierung: 20.09.2024, 08:22 MESZ