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Investors’ Risk Appetite and Global Financial Market Conditions

  • Brenda González-Hermosillo
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    A structural vector autoregression model is developed to analyze the dynamics of bond spreads among a sample of mature and developing countries during periods of financial stress in the last decade. The model identifies and quantifies the contribution on bond spreads from global market conditions (including funding liquidity, market liquidity, as well as credit and volatility risks), contagion effects, and idiosyncratic factors. While idiosyncratic factors explain a large amount of the changes in bond spreads over the sample, global market risk factors are fundamental driving forces during periods of stress. The relative importance of the different risk factors changes substantially depending on the crisis episode. Contagion from emerging markets becomes small or non-existent when global financial market risks explicitly are taken into account.

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    Paper provided by International Monetary Fund in its series IMF Working Papers with number 08/85.

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    Length: 75
    Date of creation: 01 Apr 2008
    Date of revision:
    Handle: RePEc:imf:imfwpa:08/85
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    1. Olivier Jean Blanchard & Danny Quah, 1988. "The Dynamic Effects of Aggregate Demand and Supply Disturbance," Working papers 497, Massachusetts Institute of Technology (MIT), Department of Economics.
    2. Gai, Prasanna & Vause, Nicholas, 2005. "Measuring Investors' Risk Appetite," MPRA Paper 818, University Library of Munich, Germany.
    3. Laura E. Kodres & Matthew Pritsker, 2002. "A Rational Expectations Model of Financial Contagion," Journal of Finance, American Finance Association, vol. 57(2), pages 769-799, 04.
    4. Coudert, Virginie & Gex, Mathieu, 2008. "Does risk aversion drive financial crises? Testing the predictive power of empirical indicators," Journal of Empirical Finance, Elsevier, vol. 15(2), pages 167-184, March.
    5. Rasmus Ruffer & Livio Stracca, 2007. "What is global excess liquidity, and does it matter?," Money Macro and Finance (MMF) Research Group Conference 2006 120, Money Macro and Finance Research Group.
    6. Jun Liu & Francis A. Longstaff & Ravit E. Mandell, 2006. "The Market Price of Risk in Interest Rate Swaps: The Roles of Default and Liquidity Risks," The Journal of Business, University of Chicago Press, vol. 79(5), pages 2337-2360, September.
    7. Marcello Pericoli & Massimo Sbracia, 2003. "A Primer on Financial Contagion," Journal of Economic Surveys, Wiley Blackwell, vol. 17(4), pages 571-608, 09.
    8. Reinhart, Carmen & Kaminsky, Graciela, 2008. "The center and the periphery: The globalization of financial turmoil," MPRA Paper 14100, University Library of Munich, Germany.
    9. Brenda González-Hermosillo & Vance Martin & Mardi Dungey & Renee Fry, 2003. "Characterizing Global Investors' Risk Appetite for Emerging Market Debt During Financial Crises," IMF Working Papers 03/251, International Monetary Fund.
    10. Mardi Dungey & Renee Fry & Vance Martin & Brenda González-Hermosillo, 2004. "Empirical Modeling of Contagion; A Review of Methodologies," IMF Working Papers 04/78, International Monetary Fund.
    11. Nicholas Barberis & Ming Huang & Tano Santos, 2001. "Prospect Theory And Asset Prices," The Quarterly Journal of Economics, MIT Press, vol. 116(1), pages 1-53, February.
    12. Kumar, Manmohan S & Persaud, Avinash, 2002. "Pure Contagion and Investors' Shifting Risk Appetite: Analytical Issues and Empirical Evidence," International Finance, Wiley Blackwell, vol. 5(3), pages 401-36, Winter.
    13. Dungey, Mardi & Fry, Renee & Gonzalez-Hermosillo, Brenda & Martin, Vance, 2006. "Contagion in international bond markets during the Russian and the LTCM crises," Journal of Financial Stability, Elsevier, vol. 2(1), pages 1-27, April.
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