Finance and Volatility

doi:10.1017/CBO9780511510755.009

6 - Finance and Volatility

Published online by Cambridge University Press: 25 July 2009

Stijn Claessens

Edited by

Joshua Aizenman and

Brian Pinto

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Stijn Claessens: Affiliation:
Senior Adviser, Financial Sector Operations & Policy, The World Bank; Professor of International Finance Policy, University of Amsterdam
Joshua Aizenman: Affiliation:
University of California, Santa Cruz
Brian Pinto: Affiliation:
The World Bank

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Summary

ABSTRACT: Risk sharing is an important function of any financial system, although there are natural limits to the degree of risk sharing across individuals, corporations, and countries. How effective a financial system is in providing risk diversification can depend on its capitalization and its institutional development, including the quality of its regulation and supervision. A financial system will typically not provide full risk insurance, and may even propagate economic variability or create risks of its own. Before or during a crisis, financial markets and institutions can play a large role in causing or amplifying financial crises because of balance sheet effects and contagion, among others. Following a crisis, the state of the financial sector can impede the efficacy of restructuring policies and the ability to resume growth. This study reviews the literature on these issues and highlights the areas where knowledge is still limited.

CONCEPTS AND DEFINITIONS

Even though the financial sector has long been regarded as a key part of any economy, the importance of its links to economic performance is only coming to be fully appreciated and analyzed in the last decade or so. This statement is even more true of the relationship between finance and volatility. The purpose of this study is to present recent analytical thinking and empirical evidence regarding these topics to practitioners. The chapter opens with the basic concepts explaining why financial contracts, markets, and intermediaries arise (for definitions of terms, see Box 6.1).

Type: Chapter
Information: Managing Economic Volatility and Crises
A Practitioner's Guide
, pp. 213 - 280

DOI: https://doi.org/10.1017/CBO9780511510755.009 [Opens in a new window]

Publisher: Cambridge University Press

Print publication year: 2005

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6 - Finance and Volatility

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