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International financial transmission: emerging and mature markets

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Author Info
Felices, Guillermo () (Citigroup)
Grisse, Christian () (Federal Reserve Bank of New York)
Yang, Jing () (Bank of England)

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Abstract

With an increasingly integrated global financial system, we frequently observe that shocks to individual asset markets affect financial markets worldwide. The aim of this paper is to quantify the comovements between bond markets in the US and emerging market economies using daily data from prior to the East Asian crisis through to the early stages of the current global financial crisis. We exploit the changing volatility of the data to fully identify a structural VAR, without imposing ad hoc restrictions. We find that shocks that widen emerging market sovereign debt (EMBIG) spreads have a negative effect on US interest rates in the short run (consistent with 'flight to quality' effects), while shocks that increase US interest rates raise EMBIG spreads over longer horizons (consistent with 'financing cost' or 'search for yield' effects). We also find that shocks that increase EMBIG spreads tend to widen US high-yield spreads and vice versa, constituting an important contagion channel through which crises in emerging market economies can affect mature markets. Forecast error variance decompositions show that shocks to US long rates can explain around 60%-70% of the variation of EMBIG and US high-yield spreads.

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Paper provided by Bank of England in its series Bank of England working papers with number 373.

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Length: 43 pages
Date of creation: 24 Aug 2009
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Handle: RePEc:boe:boeewp:0373

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Find related papers by JEL classification:
C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions
F30 - International Economics - - International Finance - - - General
G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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