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Stocks, bonds, money markets and exchange rates - measuring international financial transmission

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Author Info
Michael Ehrmann () (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt, Germany)
Marcel Fratzscher () (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.)
Roberto Rigobon () (Massachusetts Institute of Technology, Cambridge MA 02142-1347, USA.)

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Abstract

The paper presents a framework for analyzing the degree of financial transmission between money, bond and equity markets and exchange rates within and between the United States and the euro area. We find that asset prices react strongest to other domestic asset price shocks, and that there are also substantial international spillovers, both within and across asset classes. The results underline the dominance of US markets as the main driver of global financial markets - US financial markets explain, on average, more than 25% of movements in euro area financial markets, whereas euro area markets account only for about 8% of US asset price changes. The international propagation of shocks is strengthened in times of recession, and has most likely changed in recent years - prior to EMU, the paper finds smaller international spillovers.

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Paper provided by European Central Bank in its series Working Paper Series with number 452.

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Length: 47 pages
Date of creation: Mar 2005
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Handle: RePEc:ecb:ecbwps:20050452

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Related research
Keywords: International financial markets integration transmission financial market linkages identification heteroskedasticity asset pricing United States euro area.

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Find related papers by JEL classification:
E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
F3 - International Economics - - International Finance
C5 - Mathematical and Quantitative Methods - - Econometric Modeling

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Full references

Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Enzo Weber, 2007. "Who Leads Financial Markets?," SFB 649 Discussion Papers SFB649DP2007-015, Sonderforschungsbereich 649, Humboldt University, Berlin, Germany. [Downloadable!]
    Other versions:
  2. Balazs Egert & Lubos Komarek, 2005. "Foreign Exchange Interventions and Interest Rate Policy in the Czech Republic: Hand in Glove?," Working Papers 2005/07, Czech National Bank, Research Department. [Downloadable!]
    Other versions:
  3. Marco Cipriani & Graciela L. Kaminsky, 2007. "Volatility in International Financial Market Issuance: The Role of the Financial Center," Working Papers 212007, Hong Kong Institute for Monetary Research. [Downloadable!]
    Other versions:
  4. Jean Boivin & Marc Giannoni, 2008. "Global Forces and Monetary Policy Effectiveness," NBER Working Papers 13736, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  5. Fabio C. Bagliano & Claudio Morana, 2007. "Business Cycle Comovement in the G-7: Common Shocks or Common Transmission Mechanisms?," Carlo Alberto Notebooks 40, Collegio Carlo Alberto. [Downloadable!]
  6. Massimo Guidolin & Stuart Hyde, 2008. "Equity portfolio diversification under time-varying predictability and comovements: evidence from Ireland, the US, and the UK," Working Papers 2008-005, Federal Reserve Bank of St. Louis. [Downloadable!]
  7. Pelin Berkmen & Eduardo E. Cavallo, 2007. "Exchange Rate Policy and Liability Dollarization: An Empirical Study," IMF Working Papers 07/33, International Monetary Fund. [Downloadable!]
  8. Joshua Hausman & Jon Wongswan, 2006. "Global asset prices and FOMC announcements," International Finance Discussion Papers 886, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
  9. Mehl, Arnaud, 2006. "The yield curve as a predictor and emerging economies," BOFIT Discussion Papers 18/2006, Bank of Finland, Institute for Economies in Transition. [Downloadable!]
    Other versions:
  10. Michael Ehrmann & Marcel Fratzscher, 2006. "Global financial transmission of monetary policy shocks," Working Paper Series 616, European Central Bank. [Downloadable!]
    Other versions:
  11. Mardi Dungey & Renee Fry & Brenda Gonzales-Hermosillo & Vance L. Martin, 2005. "Shocks And Systemic Influences: Contagion In Global Equity Markets In 1998," CAMA Working Papers 2005-15, Australian National University, Centre for Applied Macroeconomic Analysis. [Downloadable!]
  12. Fabio C. Bagliano & Claudio Morana, 2006. "International Macroeconomic Dynamics: A Factor Vector Autoregressive Approach," Carlo Alberto Notebooks 32, Collegio Carlo Alberto. [Downloadable!]
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    Other versions:
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