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Global imbalances, cross-market linkages, and the financial crisis : a multivariate Markov-Switching analysis

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  • Chevallier, Julien

Abstract

Based on multivariate Markov-switching models, this paper presents new results on the interactions between global imbalances, credit spreads, housing markets, macroeconomic variables, commodities and equities during Q1-1987/Q1-2011. We show that rising global imbalances and the uncontrolled development of the US mortgage and housing markets have been deeply destabilizing the economy, with various shocks impacting subsequently equity markets and macroeconomic variables. But we also uncover, surprisingly, that the cross-market linkages with the commodity markets are strong. Finally, we identify that the US housing market lies at the epicenter of the crisis through its multiple and highly significant interactions with the other variables in the system (including the global imbalances). Sub-samples and alternative time series estimates are provided to check the statistical congruency of the various models.

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Paper provided by Paris Dauphine University in its series Economics Papers from University Paris Dauphine with number 123456789/8773.

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Date of creation: May 2012
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Publication status: Published in Economic Modelling, 2012, Vol. 29, no. 3. pp. 943-973.Length: 30 pages
Handle: RePEc:dau:papers:123456789/8773

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Keywords: Equities; Commodities; Macroeconomy; Housing market; Credit spread; Multivariate Markov-switching model; Financial crisis; Cross-market linkages; Global imbalances;

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  1. Liao, Jui-Jung & Shih, Ching-Hui & Chen, Tai-Feng & Hsu, Ming-Fu, 2014. "An ensemble-based model for two-class imbalanced financial problem," Economic Modelling, Elsevier, vol. 37(C), pages 175-183.

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