Trade Openness and Volatility

Table T1. Summary Statistics Used in Magnitude Calculations

Notes: This table reports the averages of the variables used to calculate
the three effects in equation (10) for the full sample and the various
subsamples. σ² is the average sector-level volatility, ρ is the average
correlation coefficient between an individual sector and the aggregate
less that sector, h is the average Herfindahl index, and σ_A² _- is the average
volatility of the aggregate minus one sector, which we approximate by
the aggregate volatility.

the United Kingdom) to 80 percent (e.g., Indonesia). This change in overall trade leads
to a change in sector-level variance of ∆σ² = 0.0045. Using equation (10), we calculate
that this increase in sector-level volatility raises aggregate volatility by 0.0009, which is
of course considerably smaller than the sector-level increase, due to diversification among
sectors. This change is sizeable, however, relative to the magnitudes of aggregate volatility
we observe. In particular, it is equivalent to about 10.2% of the average aggregate variance
found in our data.

Moving on to the Comovement Effect, our regression estimates indicate that the same
increase in trade results in a reduction of correlation between the sector and the aggregate
equal to ∆ρ = 0.021. Plugging this into equation (10) and evaluating the partial derivative,
we obtain a reduction in the aggregate variance due to decreased comovement equal to
-0.00033. This is about one third the magnitude of the sectoral volatility effect, and
amounts to a reduction equivalent to 3.9% of the mean aggregate variance observed in our
data. Finally, according to our estimates, the change in overall trade openness equivalent
to moving from the 25^th to the 75^th percentile leads to a change in the Herfindahl index of
∆h = 0.035. The resulting change in aggregate volatility from this increased specialization
is ∆σ_A² = 0.0011. Thus, increased specialization raises aggregate volatility by about 12.8%
of its mean.

These calculations, summarized in the first two rows of Table 9, imply changes in aggre-
gate volatility resulting from trade that are relatively modest and plausible in magnitude.

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