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What drives euro area financial market developments? The role of US spillovers and global risk

Author

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  • Brandt, Lennart
  • Saint Guilhem, Arthur
  • Schröder, Maximilian
  • Van Robays, Ine

Abstract

Financial asset prices contain a rich set of real-time information on the economy. To extract this information, it is crucial to understand the driving factors behind financial market developments. In this paper, we exploit daily cross-asset price movements in a sign-restricted BVAR model to analyse the extent to which euro area and US yields, equity prices, and the euro-US dollar exchange rate are jointly driven by monetary policy, macro and global risk factors. A novelty is that we allow for cross-Atlantic spillovers while also accounting for the unique role of the US in the global financial system. Our results underline the importance of US spillovers and shifts in global risk sentiment for understanding the dynamics of euro area financial variables. Euro area shocks transmit much less to US financial markets in comparison, with global risk shocks being more important instead. Using the daily shocks as instruments in a Proxy-SVAR, we demonstrate that the transmission of financial market movements to the macroeconomy depends on the underlying driver, thereby illustrating why it matters to look into the driving factors in the first place. JEL Classification: C32, C54, E44, E52

Suggested Citation

  • Brandt, Lennart & Saint Guilhem, Arthur & Schröder, Maximilian & Van Robays, Ine, 2021. "What drives euro area financial market developments? The role of US spillovers and global risk," Working Paper Series 2560, European Central Bank.
  • Handle: RePEc:ecb:ecbwps:20212560
    Note: 688159
    as

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    References listed on IDEAS

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    1. Lodge, David & Manu, Ana-Simona, 2022. "EME financial conditions: Which global shocks matter?," Journal of International Money and Finance, Elsevier, vol. 120(C).

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    More about this item

    Keywords

    financial conditions; high-frequency identification; international transmission; large-scale asset purchases; monetary policy;
    All these keywords.

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • C54 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Quantitative Policy Modeling
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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