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BFSI Chronicle, 2 Annual Issue, 10 Edition July 2022
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between price shocks in one market and returns it would be convenient to comprehend how
plus volatilities in another geographically an unanticipated interest rate change could
distinct market. The wide focus of these distress the conditional variance of the
studies generally revolves around the spill exchange rate. Finally, more effective policies
overs existing across markets within the equity, can be carved if policymakers could identify
foreign exchange, and fixed-income segments, the depth and duration of impact which is left
showing how much information has been by a policy initiative in one financial market on
transmitted across these markets within certain other markets.
segments. And such analysis of transmission is
quite important between markets for several Literature Review
The first study examining the relationship
reasons.
between economic growth and financial
Firstly, the lagged information generated in development was done by Schumpeter (1911).
another market is not much useful in predicting According to Schumpeter (1911), it is necessary
returns and volatility in the studied market, conditions for technological innovation and
this has been proven by the notion of market economic growth by activating savings by
efficiency. Also, if there exists a correlation financial intermediaries, managing risk,
in the news about fundamentals then the evaluating projects, monitoring managers'
presence of spill overs does not imply failure performance and facilitating transactions.
of market efficiency. Secondly, to determine However, this view of Schumpeter has not been
the persistence and magnitude of innovation accepted by many economists. Economists
it is essential to understand how shocks are who oppose this view believe that financial
propagated across markets. Lastly, learning development is a relatively insignificant factor
about the price and volatility spill overs among for economic growth. The relationship between
the markets is helpful from a risk management financial development and economic growth
perspective. It helps to analyses how markets differs from country to country. While financial
are interrelated and designs elective strategies development affects economic growth in some
for hedging against shocks that are propagated countries, the opposite situation is observed in
across markets. some countries or there is no relation in some
countries (Levine, 2005, p. 1-3).
For economic policy-makers, awareness of
the nature of volatility transmissions across While Robinson (1952) examines the
markets is essential because: firstly, it assures relationship between economic growth and
with regards to the financial stability within financial development, he argues that there
an economy. If we put forth the argument that is a one-way relationship between variables.
volatility can be transmitted across markets According to Robinson (1952), if the demand
then, it can be claimed that large shocks in one for services offered by financial intermediaries
market have a destabilizing impact on another in a country increases, financial development
market. Secondly, linkages across various will occur in that country. These financial
financial markets help to examine the success services are related to the real sector. The
of policy implementation. For instance, if a financial sector will develop as the real sector
central bank wishes to change interest rates and grows and develops. In addition, Robinson
at the same time curtail exchange rate volatility, (1952) argued that the development in the

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