International Financial Transmission: Emerging and Mature Markets

43 Pages Posted: 25 Aug 2009 Last revised: 18 Sep 2009

See all articles by Guillermo Felices

Guillermo Felices

Bank of England - Monetary Analysis

Christian Grisse

Federal Reserve Bank of New York

Yang Jing

affiliation not provided to SSRN

Multiple version iconThere are 2 versions of this paper

Date Written: August 24, 2009

Abstract

With an increasingly integrated global financial system, we frequently observe that shocks to individual asset markets affect financial markets worldwide. The aim of this paper is to quantify the comovements between bond markets in the US and emerging market economies using daily data from prior to the East Asian crisis through to the early stages of the current global financial crisis. We exploit the changing volatility of the data to fully identify a structural VAR, without imposing ad hoc restrictions. We find that shocks that widen emerging market sovereign debt (EMBIG) spreads have a negative effect on US interest rates in the short run (consistent with ‘flight to quality’ effects), while shocks that increase US interest rates raise EMBIG spreads over longer horizons (consistent with ‘financing cost’ or ‘search for yield’ effects). We also find that shocks that increase EMBIG spreads tend to widen US high-yield spreads and vice versa, constituting an important contagion channel through which crises in emerging market economies can affect mature markets. Forecast error variance decompositions show that shocks to US long rates can explain around 60%-70% of the variation of EMBIG and US high-yield spreads.

JEL Classification: C32, F30, G15

Suggested Citation

Felices, Guillermo and Grisse, Christian and Jing, Yang, International Financial Transmission: Emerging and Mature Markets (August 24, 2009). Bank of England Working Paper No. 373, Available at SSRN: https://ssrn.com/abstract=1460573 or http://dx.doi.org/10.2139/ssrn.1460573

Guillermo Felices

Bank of England - Monetary Analysis ( email )

Threadneedle Street
London EC2R 8AH
United Kingdom

Christian Grisse

Federal Reserve Bank of New York ( email )

33 Liberty Street
New York, NY 10045
United States

HOME PAGE: http://nyfedeconomists.org/grisse/

Yang Jing (Contact Author)

affiliation not provided to SSRN ( email )

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