Safe Havens, Feedback Loops, and Shock Propagation in Global Asset Prices

46 Pages Posted: 3 Jun 2014

See all articles by Franziska Ohnsorge

Franziska Ohnsorge

International Monetary Fund (IMF)

Marcin Wolski

European Investment Bank

Y. Sophia Zhang

International Monetary Fund (IMF)

Date Written: May 2014

Abstract

We create a network of bilateral correlations of changes in sovereign bond yields and individual bank equity price changes since 2000. We extract some stylized facts from this network of asset price correlations and document the clear differences in asset price correlations between safe havens and non-safe havens: safe havens, as commonly defined, have higher sovereign-sovereign, bank-bank, and bank-sovereign correlations than nonsafehavens. In a simple shock propagation model, we illustrate how these higher correlations may turn safe havens into shock propagators. While we discuss safe havens as a group, we document how the US is in a category of its own, differing significantly fromthe other countries including Switzerland or Japan. Separately, we find that feedback loops amplify shocks, and those emanating from bank stress more than those emanating from sovereign stress.

Keywords: Asset prices, Capital flows, Banks, Stock prices, External shocks, Economic models, Feedback loops, Sovereigns, bond yields, sovereign bond, equity prices, stock market, sovereign bonds, risk aversion, bond market, bond markets, financial stability, sovereign bond markets, financial system, financial market, hedges, government bond, financial markets, government bond markets, international standards, interbank money markets, equity returns, financial contagion, financial sector, stock market volatility, equity markets, bond investment, liquid markets, term bond, asset markets, credit rating

JEL Classification: F30, F65, G10

Suggested Citation

Ohnsorge, Franziska and Wolski, Marcin and Zhang, Y. Sophia, Safe Havens, Feedback Loops, and Shock Propagation in Global Asset Prices (May 2014). IMF Working Paper No. 14/81, Available at SSRN: https://ssrn.com/abstract=2445466

Franziska Ohnsorge (Contact Author)

International Monetary Fund (IMF) ( email )

700 19th Street NW
Washington, DC 20431
United States

Marcin Wolski

European Investment Bank ( email )

Luxembourg City, 2968
Luxembourg
691286623 (Phone)

Y. Sophia Zhang

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

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