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Determinants of US financial fragility conditions

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  • Fabio C. Bagliano

    ()
    (Department of Economics and Statistics (Dipartimento di Scienze Economico-Sociali e Matematico-Statistiche), University of Torino, Italy)

  • Claudio Morana

    ()
    (Department of Economics, University of Milan-Bicocca)

Abstract

The recent financial crisis has highlighted the fragility of the US (and other countries') financial system under several respects. In this paper, the properties of a summary index of financial fragility, obtained by combining information conveyed by the "Agency", "Ted" and "BAA-AAA" spreads, timely capturing changes in credit and liquidity risk, distress in the mortgage market, and corporate default risk, are investigated over the 1986-2010 period. The empirical results show that observed fluctuations in the financial fragility index can be attributed to identified (global and domestic) macroeconomic (20%) and financial disturbances (40% to 50%), over both short- and long-term horizons, as well as to oil-supply shocks in the long-term (25%). The investigation of specific episodes of financial distress, occurred in 1987, 1998 and 2000, and, more recently, over the 2007-2009 period, shows that sizable fluctuations in the index are largely determined by financial shocks, while macroeconomic disturbances have generally had a stabilizing effect.

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File URL: http://eco83.econ.unito.it/RePEc/wp/m11.pdf
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Paper provided by Department of Economics and Statistics (Dipartimento di Scienze Economico-Sociali e Matematico-Statistiche), University of Torino in its series Working papers with number 011.

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Length: 29 pages
Date of creation: Sep 2012
Date of revision:
Handle: RePEc:tur:wpapnw:011

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Keywords: financial fragility; US; macro-finance interface; international business cycle; factor vector autoregressive models; financial crisis; Great Recession;

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  1. Working, Holbrook, 1960. "Speculation on Hedging Markets," Food Research Institute Studies, Stanford University, Food Research Institute, issue 02, May.
  2. Lubos Pastor & Robert F. Stambaugh, 2001. "Liquidity Risk and Expected Stock Returns," NBER Working Papers 8462, National Bureau of Economic Research, Inc.
  3. Granger, Clive W. J. & Jeon, Yongil, 2004. "Thick modeling," Economic Modelling, Elsevier, vol. 21(2), pages 323-343, March.
  4. Fabio Bagliano & Claudio Morana, 2010. "The Great Recession: US dynamics and spillovers to the world economy," CeRP Working Papers 103, Center for Research on Pensions and Welfare Policies, Turin (Italy).
  5. Carhart, Mark M, 1997. " On Persistence in Mutual Fund Performance," Journal of Finance, American Finance Association, vol. 52(1), pages 57-82, March.
  6. Claudio Morana, 2013. "The oil price-macroeconomy relationship since the mid-1980s: A global perspective," Working Papers 223, University of Milano-Bicocca, Department of Economics, revised Feb 2013.
  7. Fama, Eugene F. & French, Kenneth R., 1993. "Common risk factors in the returns on stocks and bonds," Journal of Financial Economics, Elsevier, vol. 33(1), pages 3-56, February.
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Cited by:
  1. Claudio Morana, 2013. "Factor Vector Autoregressive Estimation of Heteroskedastic Persistent and Non Persistent Processes Subject to Structural Breaks: New Insights on the US OIS SPreads Term Structure," Working Papers 233, University of Milano-Bicocca, Department of Economics, revised Feb 2013.

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