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Global, Regional and Country-Specific Components of Financial Market Indicators: An Extraction Method and Applications

Author

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  • Zalán Kocsis

    () (Magyar Nemzeti Bank (central bank of Hungary))

Abstract

This paper presents a variance decomposition method - factor analysis with Procrustes rotation - that is capable of separating the global, regional and idiosyncratic components of various financial market indicators. The method is applied to indicators of five key financial markets: sovereign CDS spreads, stock indices, exchange rates, EMBI Global bond spreads and 10-year reference yields of domestic government bond markets. The results support the finding of the literature of a significant global component in most markets, but also point out the importance of regional correlations. Based on the method two practical applications are proposed: one, which is useful in the daily monitoring of financial markets to identify magnitudes of risk premium shocks of global, regional and country-specific origins; and another one, which gauges channels of risk propagation from the eurozone periphery.

Suggested Citation

  • Zalán Kocsis, 2013. "Global, Regional and Country-Specific Components of Financial Market Indicators: An Extraction Method and Applications," MNB Working Papers 2013/3, Magyar Nemzeti Bank (Central Bank of Hungary).
  • Handle: RePEc:mnb:wpaper:2013/3
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    References listed on IDEAS

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    3. De Santis, Roberto A., 2012. "The Euro area sovereign debt crisis: safe haven, credit rating agencies and the spread of the fever from Greece, Ireland and Portugal," Working Paper Series 1419, European Central Bank.
    4. von Hagen, Jürgen & Schuknecht, Ludger & Wolswijk, Guido, 2011. "Government bond risk premiums in the EU revisited: The impact of the financial crisis," European Journal of Political Economy, Elsevier, vol. 27(1), pages 36-43, March.
    5. Francis A. Longstaff & Jun Pan & Lasse H. Pedersen & Kenneth J. Singleton, 2011. "How Sovereign Is Sovereign Credit Risk?," American Economic Journal: Macroeconomics, American Economic Association, vol. 3(2), pages 75-103, April.
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    8. Fratzscher, Marcel, 2012. "Capital flows, push versus pull factors and the global financial crisis," Journal of International Economics, Elsevier, pages 341-356.
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    Cited by:

    1. Kliber Agata, 2016. "Impact Of The Ban On Uncovered SCDS Trade On the Interdependencies Between The CDS Market And Other Sectors Of Financial Markets. The Case Of Safe And Developed Versus Risky And Developing European Ma," Comparative Economic Research, De Gruyter Open, vol. 19(1), pages 77-99, March.
    2. Agata Kliber, 2014. "The Dynamics of Sovereign Credit Default Swaps and the Evolution of the Financial Crisis in Selected Central European Economies," Czech Journal of Economics and Finance (Finance a uver), Charles University Prague, Faculty of Social Sciences, vol. 64(4), pages 330-350, September.

    More about this item

    Keywords

    variance decomposition; factor analysis; Procrustes rotation; spillover; cross-country correlations; cross-asset correlations;

    JEL classification:

    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • C38 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Classification Methdos; Cluster Analysis; Principal Components; Factor Analysis
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy

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