The paper “Financial Structure, Economic Growth and Volatility: A Framework of Optimal Industrial Portfolio”, coauthored by Associate Professor Qin GOU from the School of Finance of Central University of Finance and Economics, Associate Professor Xiaoguang LIU from the National Development Institute of Renmin University of China and Tianyu JIANG who is a postgraduate student of Guanghua Management School of Peking University, was published in the 5^td issue of “Management World”, 2019. Tianyu JIANG is an undergraduate student of cohort 2013 in the School of Finance, a member of the 4^th phase of the outstanding academic talent training program.

Abstract: We revisit the effect of financial structure on economic growth and volatility under a framework of optimal industrial portfolio, which transfers the relationship between growth and volatility into a sectoral reallocation issue and addresses endogeneity concerns. By applying sectoral data of 26 OECD countries from 1970 to 2010, we construct an optimal benchmark allocation model that minimizes an economy's volatility for given labor productivity growth. We find robust empirical evidence that a more market-based financial structure helps fasten the convergence towards the benchmark optimal sectoral allocation. Further analysis suggests that this effect is more likely to reallocate investment toward sectors consisting of firms depending more on external finance or sectors with a larger share of small and young firms. Conclusions drawn in this paper well survive endogeneity and robustness checks.

Keywords: Financial structure；Economic fluctuation；Economic Growth；  Optimal industrial configuration