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

 
Author/Editor: Franziska Ohnsorge ; Marcin Wolski ; Yuanyan Sophia Zhang
 
Publication Date: May 09, 2014
 
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Disclaimer: This Working Paper should not be reported as representing the views of the IMF. The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate
 
Summary: 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 nonsafe havens. 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 from the 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.
 
Series: Working Paper No. 14/81
Subject(s): Asset prices | Capital flows | Banks | Stock prices | External shocks | Economic models

 
English
Publication Date: May 09, 2014
ISBN/ISSN: 9781484381588/1018-5941 Format: Paper
Stock No: WPIEA2014081 Pages: 45
Price:
US$18.00 (Academic Rate:
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