# **7.** **<u>Conclusions</u>**

The picture on financial globalization that the existing literature provides is a mixed one that depends very much on the period(s) considered. While according to some (e.g., Berger et al. 2011, Levy Yeyati and Williams, 2012) the world is becoming increasing financially globalized, according to others, this could have been the case before the global financial crisis but not after. For instance, Kristin Forbes (Forbes, 2014) wonders whether “ _financial deglobalization_ [is not] a more accurate description of today than _financial globalization._ ” To shed some new light on the patterns of financial globalization in the last quarter century, in this paper we compute a new measure of financial globalization. Our measure is based on the comovements of countries’ stock return indices and a global financial factor. However, what sets our analysis apart from most of the existing literature is that we correct for the heteroscedasticity of such global factor. The correction has important implications for the patterns of financial globalization and shows that the latter has a stop and go pattern, it increases when global financial markets are calm and experiences set-backs when they become turbulent.

Adjusting for changes in the variance of the global factor also affects our understanding of recent financial globalization trends. Without such an adjustment, one would be tempted to conclude that during the pre-crisis period developed markets integrated at a faster pace than emerging and frontier, and that after the crisis all country groups entered in a de-globalization phase. Instead, using our FGI, the picture is quite different. Before the global financial crisis, countries with less developed financial markets were converging towards those with more developed ones. The global financial crisis further narrowed the difference in financial globalization between country groups, but this was because of the sharper decline in developed markets. However, in the aftermath of the crisis, developed and emerging markets have recovered their pre-crisis financial globalization levels, while frontier markets apparently entered in a deglobalization phase.

The second important issue we address in this paper is the relation between financial globalization and financial volatility. Our main finding is that the relation is different in tranquil and turbulent times, negative in the former and positive in the latter. In other words, financial globalization dampens turbulence when turbulence is low, and it amplifies it in periods of financial distress. On average, we find that the dampening effect dominates, but the magnitudes of the stabilizing (or destabilizing) effects are different across country groups and depend on the empirical specifications and estimation techniques. This being said, we find that financial globalization tends to reduce volatility in frontier and emerging markets more than in developed ones.

One reason why the estimated effects of financial globalization can differ across countries is that they may be affected by the frequency and magnitude of domestic shocks relative to the external ones. When the former dominate, financial globalization provides diversification opportunities, when the latter do, it may instead be a source of instability. In developed economies, domestic shocks are likely to play a relatively smaller role than in emerging or frontier ones. This can be the reason why financial globalization, on average, is more likely to reduce stock market volatility in emerging and frontier than it does in developed markets. We plan to address this important issue in future work.

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