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Liquidity, risk and the global transmission of the 2007–08 financial crisis and the 2010–11 sovereign debt crisis title

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Listed author(s):
  • Alexander Chudik
  • Marcel Fratzscher

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 fight-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.

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File URL: http://www.dallasfed.org/assets/documents/institute/wpapers/2012/0107.pdf
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Paper provided by Federal Reserve Bank of Dallas in its series Globalization and Monetary Policy Institute Working Paper with number 107.

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Date of creation: 2012
Handle: RePEc:fip:feddgw:107
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Cited by:

  1. Benhabib, Jess & Liu, Xuewen & Wang, Pengfei, 2016. "Sentiments, financial markets, and macroeconomic fluctuations," Journal of Financial Economics, Elsevier, vol. 120(2), pages 420-443.
  2. 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.

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