Impact of the Sectoral Structure on the Financial Instability of Regional Economies
The study is aimed at analysis of impact of the sectoral structure of economy on its financial instability and is based on the data of Russian regions in 2004–2015. Financial instability was determined as the variance of ratio of balanced financial result to GRP (called a financial return), disaggregated by 11 key economic activities. For evaluation of contribution of various activities to total volatility of financial return and its decomposition into internal and external risk, the portfolio approach by H. Markowitz was applied. As a result, we received assessments of financial instability in 82 Russian regions and explained them by differences in the sectoral structures of regional economies. The decomposition of volatility of financial return of the country portfolio evidenced that the largest absolute contribution to it was made by Manufacturing and Real estate, leasing and services activities, while Real estate and Financial activities appeared to be the factors enhancing instability to the greatest extent. Decomposition of volatility of the regional portfolios provided a slightly different result. In particular, Wholesale and retail trade and repair activity also proved to be a noticeable generator of financial instability (both in absolute and relative terms). Meanwhile, the main result of both decompositions testified that the Mining and quarrying activity had the most stabilizing effect in the period under review, despite its significant dependence on the global situation. This conclusion can be partially explained by the susceptibility of the related sectors to the spillover effects caused by primary macroeconomic shocks.
KeywordsFinancial instability Portfolio approach Sectoral structure of economy Decomposition of risk
The reported study was funded by RFBR according to the research project? 19-010-00716.
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