This research is imperative in understanding how artificial intelligence (AI) impacts financial market performance, thereby emphasizing the necessity of instituting robust regulatory frameworks. By focusing on the European Union (EU), it illustrates how accountability, transparency and governance quality shape the AI-driven innovation to enhance investor confidence, reduce systemic risks and attain financial stability.
By employing panel data from 24 EU-member states, covering a time period from 2000 to 2022, this paper applies the generalized method of moments to address endogeneity concerns. This analysis is complemented by the Arellano-Bond Estimator as a robustness check, ensuring the validity of the empirical results.
The empirical findings of the paper indicate that strong regulatory frameworks are the foundation of enhanced financial performance since they are incremental in reducing systemic risks and promoting investor confidence. Moreover, ICT diffusion is a vital component that contributes to financial innovation, however its benefits are contingent on effective governance quality.
This study has key policy implications for the EU when it comes to amplifying financial market performance, driving sustainability objectives and attaining regulatory reforms. AI integration has become quintessential across the EU financial sector due to its indispensable nature in promoting transparency, accountability, fraud detection services and fair governance practices. Moreover, AI models are being employed across the financial sector for forecasting trends, protecting consumers’ privacy concerns and in FinTech-related services.
While existing studies shed light on the broader implications of regulation, and the benefits of governance to amplify technological benefits, they lack in addressing the direct role of regulatory quality on AI’s integration in financial markets. Furthermore, they also neglect the role regulatory quality and patents play on ICT diffusion across financial markets. Thus, this study endeavors to address all of these gaps.
