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Liquidity, Risk and the Global Transmission of the 2007-08 Financial Crisis and the 2010-11 Sovereign Debt Crisis

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  • Chudik, Alexander
  • Fratzscher, Marcel

Abstract

The paper analyses the transmission of liquidity shocks and risk shocks to global financial markets. Using a Global VAR methodology, the findings reveal fundamental differences in the transmission strength and pattern between the 2007-08 financial crisis and the 2010-11 sovereign debt crisis. Unlike in the former crisis, emerging market economies have become much more resilient to adverse shocks in 2010-11. Moreover, a flight-to-safety phenomenon across asset classes has become particularly strong during the 2010-11 sovereign debt crisis, with risk shocks driving down bond yields in key advanced economies. The paper relates this evolving transmission pattern to portfolio choice decisions by investors and finds that countries' sovereign rating, quality of institutions and their financial exposure are determinants of cross-country differences in the transmission.

Suggested Citation

  • Chudik, Alexander & Fratzscher, Marcel, 2012. "Liquidity, Risk and the Global Transmission of the 2007-08 Financial Crisis and the 2010-11 Sovereign Debt Crisis," CEPR Discussion Papers 8787, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:8787
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    References listed on IDEAS

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    Cited by:

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    2. John Beirne & Jana Gieck, 2014. "Interdependence and Contagion in Global Asset Markets," Review of International Economics, Wiley Blackwell, vol. 22(4), pages 639-659, September.
    3. Andrejs Zlobins, 2019. "Country-Level Effects of the ECB's Expanded Asset Purchase Programme," Working Papers 2019/02, Latvijas Banka.
    4. Chen, Qianying & Filardo, Andrew & He, Dong & Zhu, Feng, 2016. "Financial crisis, US unconventional monetary policy and international spillovers," Journal of International Money and Finance, Elsevier, vol. 67(C), pages 62-81.
    5. Demirgüç-Kunt, Asli & Martinez Peria, Maria Soledad & Tressel, Thierry, 2020. "The global financial crisis and the capital structure of firms: Was the impact more severe among SMEs and non-listed firms?," Journal of Corporate Finance, Elsevier, vol. 60(C).
    6. Benhabib, Jess & Liu, Xuewen & Wang, Pengfei, 2016. "Sentiments, financial markets, and macroeconomic fluctuations," Journal of Financial Economics, Elsevier, vol. 120(2), pages 420-443.
    7. Mark A. Wynne, 2012. "Five Years of Research on Globalization and Monetary Policy: What Have We Learned?," Annual Report, Globalization and Monetary Policy Institute, Federal Reserve Bank of Dallas, pages 2-17.
    8. Feldkircher, Martin & Siklos, Pierre L., 2019. "Global inflation dynamics and inflation expectations," International Review of Economics & Finance, Elsevier, vol. 64(C), pages 217-241.

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    More about this item

    Keywords

    advanced economies; capital flows; emerging market economies; global financial crisis; high dimensional VARs; liquidity; risk; sovereign debt crisis; transmission;
    All these keywords.

    JEL classification:

    • C5 - Mathematical and Quantitative Methods - - Econometric Modeling
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • F3 - International Economics - - International Finance

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