financial globalization allows for more efficient risk-sharing, especially in the developing world. However, this can be only part of the story. Indeed, to look at average effects, even within country groups, may be misleading. The reason is that the relation between financial globalization and volatility may depend on the state of the global economy. More precisely, the effects of financial globalization may be different in tranquil and in turbulent times. To ascertain whether this is indeed the case, we compute the percentage increase in volatility of stock market returns between periods of high and “normal” volatility<sup>15</sup> in countries with different levels of financial integration. The results are summarized in Figure 4, which shows that the percentage change in volatility increases with the degree of financial integration; for countries in the top quintile of the FGI distribution the increase is around 175%, while for countries in the bottom quintile it is 50%.

**Table 3:** Financial market volatility

||(1)<br>_σR _|(2)<br>_σR _|(3)<br>_σR _|(4)<br>_σR _|(5)<br>_σR _|(6)<br>_σR _|(7)<br>_σR _|
|---|---|---|---|---|---|---|---|
|_σR t _-1|0.602***|0.599***|0.505***|0.483***|0.371***|0.496***|0.471***|
||(0.014)|(0.013)|(0.017)|(0.015)|(0.036)|(0.023)|(0.019)|
|_FGI_-1||-0.025***|-0.040***|-0.033***|-0.005|-0.043*|-0.077***|
|||(0.009)|(0.013)|(0.011)|(0.015)|(0.021)|(0.023)|
|_σGF_|||0.083***|0.094***|0.142***|0.104***|0.059***|
||||(0.005)|(0.006)|(0.008)|(0.010)|(0.007)|
|_FED_||||0.673***|0.473***|1.043***|0.501***|
|||||(0.070)|(0.093)|(0.126)|(0.107)|
|Constant|0.075***|0.083***|0.052***|0.031***|0.011|0.029***|0.046***|
||(0.003)|(0.003)|(0.004)|(0.005)|(0.009)|(0.007)|(0.006)|
|Obs.|19,294|19,294|19,294|19,294|6,359|6,537|6,398|
|R-squared|0.364|0.365|0.438|0.453|0.668|0.469|0.331|
|Countries|84|84|84|84|23|26|41|
|Type|All|All|All|All|Developed|Emerging|Frontier|
|Clustered st|andard erro|rs at country|level inpare|ntheses. ***|p<0.01,**p<|0.05,*p<0.1|.|

Figure 4 provides quite a strong piece of evidence of the differential effects of financial globalization in turbulent and tranquil periods. To understand better the circumstances under which financial globalization is more likely to amplify or to dampen the transmission of global instability to the domestic economy, we now re-run our previous regressions interacting the FGI coefficient with the volatility of the global factor.

The results are presented in table 4. For the whole sample, and for each country group, we find the FGI coefficients to be negative and significant (albeit only at the 10 percent level for developed markets) and their interactions with the volatility of the global factor positive and significant for all country groups. More precisely, for the whole sample, the relation changes sign when _σGF_ is above a threshold on the 86<sup>th</sup> percentile of its distribution. The overall effect is displayed in Figure 5, where we plot the change in (annualized) volatility associated with an increase in the FGI equal to the annual trend increase of 0.6 percent (average increase, hereinafter).

> 15 Given the skewedness of the distribution, we define as highly volatile periods those periods in the top 10 percent of the GF volatility distribution, as normally volatile periods those in the bottom 50 percent. Such thresholds are arbitrary, but results (available upon request) are similar using different ones.

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