Safe Havens, Feedback Loops, and Shock Propagation in Global Asset Prices
46 Pages Posted: 3 Jun 2014
Date Written: May 2014
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: Suggested Citation