## 7. Correlations Daily Changes in Financial Conditions

## Source details

**Canonical URL:** [7. Correlations Daily Changes in Financial Conditions](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/wp/2011/_wp11183.pdf)

## Other formats

- [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/wp/2011/_wp11183.pdf.md)
- [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/wp/2011/_wp11183.pdf.json)

---

### I. Introduction
- Event studies analyze the impact of U.S. financial, fiscal, and monetary policies on foreign asset prices across a range of G20 countries and Switzerland.
- Two baseline relationships are considered due to structural change: pre-crisis and post-crisis "typical" relationships.
- Financial policy channel: compare foreign bank excess returns to U.S. bank excess returns; bank excess returns = change in major bank equity prices less return on national equity market.
- Fiscal and monetary channel: examine responses of foreign bond yields and exchange rates to changes in the U.S. 10-year note yield.
- Analysis sequence:
  - Baseline: typical responses of foreign markets to U.S. asset price changes.
  - Policy-specific deviations: responses on days of U.S. policy announcements.
  - Additional links: U.S. equity impacts on foreign equities; U.S. 10-year yield impacts on global risk aversion and commodity prices; changing correlations before/during/after crisis.

### II. Data
- Daily data from early 2003 across 18 G-20 members and Switzerland; sample period: between 1/1/2003 and 4/8/2011.
- Key variables:
  - U.S. and foreign bond yields (local currency yields for advanced economies; EMBI spreads for emerging markets except India), bilateral exchange rates vs. dollar, nominal effective exchange rates, excess returns for major banks, equity prices (e.g., S&P 500, DAX).
  - Proxies: sovereign CDS spreads, equity market returns, expected U.S. inflation from 10-year index-linked bond.
  - Monetary stance: effective fed funds rate; expected change in fed funds over next month and one year (fed funds futures and one-year LIBOR).
  - Global market conditions: VIX; oil and nonoil commodity prices in dollars.
- U.S. policy announcement dates collected:
  - Financial policies: Dodd-Frank Act (split around Obama January 21, 2010 speech) and Fed swap announcements (dates when country included vs. swaps provided to other economies).
  - Monetary policies: QE1 (2008/09 purchases of MBS, GSE debt, Treasuries), QE2 (2010 government bond purchases); FOMC meetings pre- and post-crisis measured by Fed funds rate changes and 10-year yield changes.
  - Fiscal policies: 2008, mid-2009, late-2010 stimulus packages; pre-crisis budget announcements and key bill passage dates.
- Banking cross-sectional variables: equity capital/asset, retail deposits/assets, noninterest income/total income, number of U.S.-based subsidiaries ratio, dummy for major non-U.S. investment banks (Deutsche Bank, Barclays Capital, UBS, Credit Suisse, BNP, Société Générale, HSBC).

### III. Specification
- Event-study specification based on CAPM with the United States as the “market”.
- Regression form:
  Δy_it = α_i + (β_i + ν_i postcrisis_it + γ’ EVENTS_it) ΔUS asset price_it + δ’ΔCONDITIONS_it + ζ’Z_it + ε_it
  - y_it: foreign/global variable (foreign bank excess returns, foreign bond yields, exchange rates, equity returns).
  - postcrisis_it: dummy from start of 2007 until end of sample.
  - EVENTS_it: matrix of policy-announcement dummies.
  - US asset price_it: U.S. bank excess returns, 10-year Treasury yields, or U.S. equity returns.
  - CONDITIONS_it: market conditions (CDS, monetary expectations, commodity prices, VIX).
  - Z_it: bank cross-sectional characteristics.
- Responses measured using time-zone adjusted same-day market responses (Americas same day, Europe same/next, Asia next day where no overlap).
- Baseline window: one-day; robustness checks used 2-, 5-, and 10-day windows.
- Post-crisis dummy timing: start of 2007 (robustness check shifting to Lehman September 2008 reported in appendix).

### IV. Financial Sector Reform Results
A. Baseline Regressions
- Pre-crisis betas (U.S. → foreign bank excess returns) largest for Switzerland, then Germany, France, Spain, Japan, Korea, Canada, United Kingdom; Italy, Australia, and all emerging markets estimated with no significant links.
- Only Swiss pre-crisis beta exceeded 25 percent; otherwise a 1 percent U.S. bank excess return led to < ¼ percent increase abroad.
- Post-crisis increases in betas concentrated in Europe:
  - Post-crisis spillovers: ~60 percent to Swiss banks, 50 percent to U.K. and German banks, ~40, 30, and 20 percent to French, Italian, and Spanish banks respectively.
  - Post-crisis changes in betas insignificant for non-European systems; range from 15 percent (Korea) to 0 (Russia).
- Including bank characteristics and market variables modestly lowers betas but explains only a small part of linkages.
  - Banks with global investment banking and higher U.S. subsidiaries more closely linked to U.S. bank excess returns.

B. Policy Impact: Swaps
- Fed swap announcements raised excess returns in recipient countries (all except Korea); coefficients over unity in most cases.
- Impact in individual countries often statistically insignificant in this specification.
- Spillovers to non-recipient banking systems positive but generally insignificant, suggesting broader liquidity improvements.

C. Financial Regulation (Dodd-Frank / Volcker)
- Obama January 21, 2010 speech supporting tough banking regulation estimated to lower U.S. and most European bank equity prices.
  - Summed typical correlation and speech shift: impact on excess returns of Swiss, U.K., German, French banks larger than for U.S. banks.
  - Negative excess-return responses in many emerging markets and some advanced non-European countries (Japan, Korea, Australia, Canada).
- Other Dodd-Frank announcements: tighter U.S. regulation tended to support core European banks (negative betas for U.K. and Swiss banks), implying markets perceived potential regulatory arbitrage.
- Adding bank characteristics or market conditions does not significantly alter estimated policy impacts.

D. Monetary and Fiscal Policies (summary by country groups)
- Country groupings used: Japan; advanced commodity exporters (Australia, Canada); Korea + European advanced countries; China; financially open emerging markets (Brazil, Mexico, South Africa, Turkey); less-open emerging markets (Indonesia, Russia). India included with China for bonds, with Russia/Indonesia for exchange rates/equities.

Foreign bond yields
- Pre-crisis: U.S. yield rises had ~70 percent pass-through to financially open emerging markets; smaller for Indonesia/Russia; no link for China/India.
- Post-crisis: links with emerging markets fell or disappeared in simple regressions; when including financial conditions pre-crisis coefficient halves rather than disappears (local equity prices and sovereign CDS significant).
- Advanced economies with deeper markets: pass-through remained ~40 basis points for Europe/Korea and 15 basis points for Japan per one-percentage point U.S. yield rise.
- FOMC and budget announcements generally created little differential impact on foreign bond yields pre-crisis.

Exchange rates
- Pre-crisis: rising U.S. 10-year yields associated with dollar depreciations in advanced economies and financially open emerging markets.
- Post-crisis: higher U.S. yields led to appreciations in emerging markets and commodity exporters; little impact on advanced Europe and Korea.
- Once global financial prices included, post-crisis shifts in emerging market dollar correlations become insignificant; advanced economy shifts remain significant but smaller.

Nominal effective exchange rates
- Pre-crisis: rising U.S. yields associated with depreciations of advanced economy currencies; no significant impact on competitiveness of financially open emerging markets.
- Post-crisis: China, India, Indonesia, Russia appreciated due to dollar links; oil price role diminished when broader conditions included.

Fiscal stimulus and quantitative easing
- Fiscal packages:
  - 2008 stimulus: delinking of yields in Europe and Korea; tighter links in financially open emerging markets and Japan; yen appreciated.
  - 2009 package: delinking of European and Korean yields.
  - 2010 package: larger-than-normal increases in foreign yields and appreciations across many currencies.
- Quantitative easing:
  - QE1 (2008/09) associated with large reductions in emerging market yields and currency appreciations; linked to improvements in commodity prices, foreign equities, sovereign CDS.
  - QE2 (2010) had more muted effects on foreign markets and less improvement in global financial sentiment compared to QE1.

E. Equity Market Correlations
- Pre-crisis raw betas between U.S. and foreign equity returns ranged 0.48 (Australia/Canada) to 0.87 (Brazil, Mexico, South Africa, Turkey); China was the only insignificant beta.
- Crisis produced limited changes in equity correlations; post-crisis betas more similar, ~0.55 to 0.76.
- Adding other financial prices lowers post-crisis betas somewhat; underlying betas remain ~0.5.
- Policy announcements had limited systematic impact on equity correlations except 2010 fiscal stimuli (boosted correlations with weak non-commodity advanced countries; reduced correlations with many emerging markets and commodity exporters).

F. Results using indicators of macro, monetary, and fiscal conditions
- Table 6a: Post-crisis increases in Treasury yields associated with better global financial conditions when excluding other prices; little link pre-crisis.
- Table 6b: Including broader conditions largely removes positive relationship; exception: U.S. inflation expectations rise with higher U.S. nominal yields over entire period (between one quarter and one third of changes in nominal yields do not flow into real rates).
- QE1 and QE2 announcements disrupted typical post-crisis pattern, implying improvement in global financial asset prices due to falling U.S. yields; QE1 associated with significant rises in U.S. inflation expectations.
- Tables 6c/6d: U.S. bond yields affect expected path of policy rates; for sovereign CDS spreads post-crisis relationship disappears once other conditions included; QE1 (and to lesser extent QE2) associated with lower foreign sovereign CDS spreads.
- Correlation matrices (Table 7 pre-crisis, Table 7 lower half post-crisis): pre-crisis two groups—monetary group (short- and long-term U.S. monetary expectations, U.S. inflation expectations, U.S. NEER) and real-activity group (U.S. equities, VIX, commodity prices). Post-crisis: broad range of global asset prices highly correlated (U.S. inflation expectations, Treasury yields, U.S. NEER, risk aversion, equities, CDS, commodity prices) consistent with “risk-on/risk-off”.
- Increase in correlations occurred early in 2007; post-crisis correlations remained high through late-summer 2010 QE announcement and Q1 2011 (oil became less linked to other assets due to Middle East turmoil).

G. Robustness Checks
- Robustness to:
  - Changing crisis break from start-2007 to September 2008 (Lehman): relatively little impact on post-crisis coefficients; pre-crisis coefficients fall when break moved later.
  - Event window lengths of 2-, 5-, and 10-day: lengthening raises estimated typical bond and exchange rate links while lowering differential policy impacts; generalized fall in significance of policy announcements with longer windows. QE2 never found significant on global financial conditions across windows.

### V. Conclusions
- Underlying relationships across banking systems, bond yields, and exchange rates changed significantly pre- vs. post-crisis; policy impacts must be assessed against post-crisis high-correlated financial relationships.
- Financial policy spillovers depend on policy objective:
  - Fed swaps provided significant support to recipient foreign banking systems and improved global liquidity.
  - Tighter U.S. regulatory signaling (Volcker-rule speech) led to generalized falls in advanced-economy bank shares; emergence of potential competitive shifts benefiting conservative, well-capitalized banks in emerging markets and Japan.
  - Other Dodd-Frank aspects saw U.S. bank price falls accompanied by U.K./Swiss bank rises, implying perceived competitive advantages and regulatory arbitrage potential.
- Macro policies:
  - 2008/09 fiscal and monetary stimulus generally supported foreign activity.
  - 2010 fiscal stimulus associated with larger-than-typical rises in foreign bond yields (ambiguous spillovers).
  - QE1 had clear beneficial spillovers on emerging market yields, currencies, commodity prices, equities, and sovereign CDS; QE2 effects were more muted and its link to broad improvements in global financial conditions is difficult to establish via event studies.

### Tables and Key Quantitative Findings (selected exact figures preserved)
- Bank excess returns (Table 1a):
  - Swiss pre-crisis beta .42 (.09)**; UK .13 (.05)*; Germany .23 (.09)*; UK post-crisis shift .37 (.08)**.
- Post-crisis bank spillovers (text summary):
  - ~60 percent to Switzerland; 50 percent to U.K. and Germany; ~40, 30, 20 percent to France, Italy, Spain respectively.
- Foreign bond yields (Table 2a, basic) — US 10 Year Yield coefficients:
  - Japan .16 (.02)**; Australia and Canada .66 (.02)**; Europe and Korea .39 (.02)**; China .01 (.02); Brazil/Mexico/South Africa/Turkey .69 (.07)**; Indonesia and Russia .53 (.05)**.
- Foreign bond yields including conditions (Table 2b) — US 10 Year Yield:
  - Japan .16 (.03)**; Australia/Canada .63 (.03)**; Europe/Korea .33 (.03)**; China .18 (.06)**; Brazil group .85 (.06)**; Indonesia/Russia .74 (.12)**.
- Bilateral exchange rates (Table 3a) — US 10 Year Yield coefficients (appreciation positive):
  - Japan -1.45 (.37)**; Australia/Canada -1.88 (.33)**; Europe/Korea -1.66 (.29)**; China .08 (.08); Brazil group -1.03 (.34)**; India/Indonesia/Russia -.05 (.13).
- Nominal effective exchange rates (Table 4a) — US 10 Year Yield:
  - Japan -.90 (.31)**; Australia/Canada -1.04 (.25)**; Europe/Korea -.45 (.11)**; China .97 (.17)**; Brazil group -.02 (.30); India/Indonesia/Russia .94 (.18)**.
- Equity correlations (Table 5a) — US equity return betas:
  - Japan .58 (.05)**; Australia/Canada .48 (.02)**; Europe/Korea .76 (.05)**; China .24 (.21); Brazil group .87 (.04)**; India/Indonesia/Russia .51 (.06)**.
- Macro indicators (Table 6a) — US 10 Year Yield → US Inflation Expectation .28 (.02)**; VIX -.02 (.01); Foreign Equities .02 (.01)**; US Equities .03 (.01)**.
- Correlation structure (Table 7 pre-crisis sample extracts):
  - ΔUST10 correlated with ΔLT FFR Exp. 0.55; with ΔUS Infl. Exp. 0.49; with US Equities 0.16.
- Robustness: event-window lengthening increases typical link estimates but lowers policy differential significance.

*Source: _wp11183 - 7. Correlations Daily Changes in Financial Conditions — PDF chapter (pages as listed).*

### 7. Correlations Daily Changes in Financial Conditions...........................................................34

### 7. Correlations Daily Changes in Financial Conditions

### Major sections and page references
- "7. Correlations Daily Changes in Financial Conditions" — page 34
- "8. Correlations Daily Changes in Financial Conditions" — page 35

### Appendix Tables (titles and page references)
- A1: Foreign Bond Yields: Basic Regression – Post-Lehman — page 36
- A2: Bilateral Dollar Exchange Rates: Basic Regression – Post-Lehman — page 36
- A3: Real Economy: Basic Regressions – Post-Lehman — page 37
- A4: Foreign Bond Yields: Basic Regression – 2-day Window — page 37
- A5: Bilateral Dollar Exchange Rates: Basic Regression – 2-day Window — page 38
- A6: Real Economy: Basic Regressions – 2-day Window — page 38
- A7: Foreign Bond Yields: Basic Regression – 5-day Window — page 39
- A8: Bilateral Dollar Exchange Rates: Basic Regression – 5-day Window — page 39
- A9: Real Economy: Basic Regressions – 5-day Window — page 40
- A10: Foreign Bond Yields: Basic Regression – 10-day Window — page 40
- A11: Bilateral Dollar Exchange Rates: Basic Regression – 10-day Window — page 41
- A12: Real Economy: Basic Regressions – 10-day Window — page 41

*Source: _wp11183 - 7. Correlations Daily Changes in Financial Conditions — PDF chapter (pages as listed).*

### References .............................................................................................................

### _wp11183 - References

### I. INTRODUCTION
- Event studies analyze the impact of U.S. financial, fiscal, and monetary policies on foreign asset prices across a range of G20 countries and Switzerland.
- Two baseline relationships are considered due to structural change: pre-crisis and post-crisis "typical" relationships.
- Financial policy channel: compare foreign bank excess returns to U.S. bank excess returns; bank excess returns = change in major bank equity prices less return on national equity market.
- Fiscal and monetary channel: examine responses of foreign bond yields and exchange rates to changes in the U.S. 10-year note yield.
- Analysis sequence:
  - Baseline: typical responses of foreign markets to U.S. asset price changes.
  - Policy-specific deviations: responses on days of U.S. policy announcements.
  - Additional links: U.S. equity impacts on foreign equities; U.S. 10-year yield impacts on global risk aversion and commodity prices; changing correlations before/during/after crisis.

### II. DATA
- Daily data from early 2003 across 18 G-20 members and Switzerland.
- Key variables collected:
  - Macro and financial indicators: U.S. and foreign bond yields (local currency yields for advanced economies; EMBI spreads for emerging markets except India), bilateral exchange rates vs. dollar, nominal effective exchange rates, excess returns for major banks, equity prices (e.g., S&P 500, DAX).
  - Proxies for growth and fiscal risks: sovereign CDS spreads, equity market returns, expected U.S. inflation from 10-year index-linked bond.
  - Monetary stance: effective fed funds rate; expected change in fed funds over next month and one year (fed funds futures and one-year LIBOR).
  - Global market conditions: VIX (global risk aversion); oil and nonoil commodity prices in dollars.
- U.S. policy announcement dates collected (see Data Annex):
  - Financial policies: Dodd-Frank Act (split around Obama January 21, 2010 speech) and Fed swap announcements (dates when country included vs. swaps provided to other economies).
  - Monetary policies: QE1 (2008/09 purchases of MBS, GSE debt, Treasuries), QE2 (2010 government bond purchases); FOMC meetings pre- and post-crisis measured by Fed funds rate changes and 10-year yield changes.
  - Fiscal policies: 2008, mid-2009, late-2010 stimulus packages; pre-crisis budget announcements and key bill passage dates.
- Banking cross-sectional variables: equity capital/asset, retail deposits/assets, noninterest income/total income, number of U.S.-based subsidiaries ratio, dummy for major non-U.S. investment banks (Deutsche Bank, Barclays Capital, UBS, Credit Suisse, BNP, Société Générale, HSBC).

### III. SPECIFICATION
- Event-study specification based on CAPM with the United States as the “market”.
- Regression form:
  Δy_it = α_i + (β_i + ν_i postcrisis_it + γ’ EVENTS_it) ΔUS asset price_it + δ’ΔCONDITIONS_it + ζ’Z_it + ε_it
  - y_it: foreign/global variable (foreign bank excess returns, foreign bond yields, exchange rates, equity returns).
  - postcrisis_it: dummy from start of 2007 until end of sample.
  - EVENTS_it: matrix of policy-announcement dummies.
  - US asset price_it: U.S. bank excess returns, 10-year Treasury yields, or U.S. equity returns.
  - CONDITIONS_it: market conditions (CDS, monetary expectations, commodity prices, VIX).
  - Z_it: bank cross-sectional characteristics.
- Responses measured using time-zone adjusted same-day market responses (Americas same day, Europe same/next, Asia next day where no overlap).
- Baseline window: short one-day window; robustness checks used 2-, 5-, and 10-day windows.
- Post-crisis dummy timing: start of 2007 (robustness check shifting to Lehman September 2008 reported in appendix).

### IV. FINANCIAL SECTOR REFORM RESULTS
A. Baseline Regressions
- Pre-crisis betas (U.S. → foreign bank excess returns) largest for Switzerland, then Germany, France, Spain, Japan, Korea, Canada, United Kingdom. Italy, Australia, and all emerging markets estimated with no significant links.
- Only Swiss pre-crisis beta exceeded 25 percent; otherwise a 1 percent U.S. bank excess return led to < ¼ percent increase abroad.
- Post-crisis increases in betas concentrated in Europe:
  - Post-crisis spillovers: ~60 percent to Swiss banks, 50 percent to U.K. and German banks, ~40, 30, and 20 percent to French, Italian, and Spanish banks respectively.
  - Post-crisis changes in betas insignificant for non-European systems; range from 15 percent (Korea) to 0 (Russia).
- Including bank characteristics and market variables modestly lowers betas but explains only a small part of linkages.
  - Banks with global investment banking and higher U.S. subsidiaries more closely linked to U.S. bank excess returns.

B. Policy Impact: Swaps
- Fed swap announcements raised excess returns in recipient countries (all except Korea); coefficients over unity in most cases.
- Impact in individual countries often statistically insignificant in this specification.
- Spillovers to non-recipient banking systems positive but generally insignificant, suggesting broader liquidity improvements.

C. Financial Regulation (Dodd-Frank / Volcker)
- Obama January 21, 2010 speech supporting tough banking regulation estimated to lower U.S. and most European bank equity prices.
  - Summed typical correlation and speech shift: impact on excess returns of Swiss, U.K., German, French banks larger than for U.S. banks.
  - Negative excess-return responses in many emerging markets and some advanced non-European countries (Japan, Korea, Australia, Canada).
- Other Dodd-Frank announcements: tighter U.S. regulation tended to support core European banks (negative betas for U.K. and Swiss banks), implying markets perceived potential regulatory arbitrage.
- Adding bank characteristics or market conditions does not significantly alter estimated policy impacts.

D. Monetary and Fiscal Policies
- Results summarized across 6 country groupings: Japan; advanced commodity exporters (Australia, Canada); Korea + European advanced countries; China; financially open emerging markets (Brazil, Mexico, South Africa, Turkey); less-open emerging markets (Indonesia, Russia). India included with China for bonds, with Russia/Indonesia for exchange rates/equities.
Foreign bond yields
- Pre-crisis: U.S. yield rises had ~70 percent pass-through to financially open emerging markets; smaller for Indonesia/Russia; no link for China/India.
- Post-crisis: links with emerging markets fell or disappeared in simple regressions; when including financial conditions pre-crisis coefficient halves rather than disappears (local equity prices and sovereign CDS significant).
- Advanced economies with deeper markets: pass-through remained ~40 basis points for Europe/Korea and 15 basis points for Japan per one-percentage point U.S. yield rise.
- FOMC and budget announcements generally created little differential impact on foreign bond yields pre-crisis.
Exchange rates
- Pre-crisis: rising U.S. 10-year yields associated with dollar depreciations in advanced economies and financially open emerging markets.
- Post-crisis: higher U.S. yields led to appreciations in emerging markets and commodity exporters; little impact on advanced Europe and Korea.
- Once global financial prices included, post-crisis shifts in emerging market dollar correlations become insignificant; advanced economy shifts remain significant but smaller.
Nominal effective exchange rates
- Pre-crisis: rising U.S. yields associated with depreciations of advanced economy currencies; no significant impact on competitiveness of financially open emerging markets.
- Post-crisis: China, India, Indonesia, Russia appreciated due to dollar links; oil price role diminished when broader conditions included.
Fiscal stimulus and quantitative easing
- Fiscal packages:
  - 2008 stimulus: delinking of yields in Europe and Korea; tighter links in financially open emerging markets and Japan; yen appreciated.
  - 2009 package: delinking of European and Korean yields.
  - 2010 package: larger-than-normal increases in foreign yields and appreciations across many currencies.
- Quantitative easing:
  - QE1 (2008/09) associated with large reductions in emerging market yields and currency appreciations; linked to improvements in commodity prices, foreign equities, sovereign CDS.
  - QE2 (2010) had more muted effects on foreign markets and less improvement in global financial sentiment compared to QE1.

E. Equity Market Correlations
- Pre-crisis raw betas between U.S. and foreign equity returns ranged 0.48 (Australia/Canada) to 0.87 (Brazil, Mexico, South Africa, Turkey); China was the only insignificant beta.
- Crisis produced limited changes in equity correlations; post-crisis betas more similar, ~0.55 to 0.76.
- Adding other financial prices lowers post-crisis betas somewhat; underlying betas remain ~0.5.
- Policy announcements had limited systematic impact on equity correlations except 2010 fiscal stimuli (boosted correlations with weak non-commodity advanced countries; reduced correlations with many emerging markets and commodity exporters).

F. Results using indicators of macro, monetary, and fiscal conditions
- Table 6a: Post-crisis increases in Treasury yields associated with better global financial conditions when excluding other prices; little link pre-crisis.
- Table 6b: Including broader conditions largely removes positive relationship; exception: U.S. inflation expectations rise with higher U.S. nominal yields over entire period (between one quarter and one third of changes in nominal yields do not flow into real rates).
- QE1 and QE2 announcements disrupted typical post-crisis pattern, implying improvement in global financial asset prices due to falling U.S. yields; QE1 associated with significant rises in U.S. inflation expectations.
- Tables 6c/6d: U.S. bond yields affect expected path of policy rates; for sovereign CDS spreads post-crisis relationship disappears once other conditions included; QE1 (and to lesser extent QE2) associated with lower foreign sovereign CDS spreads.
- Correlation matrices (Table 7 pre-crisis, Table 7 lower half post-crisis): pre-crisis two groups—monetary group (short- and long-term U.S. monetary expectations, U.S. inflation expectations, U.S. NEER) and real-activity group (U.S. equities, VIX, commodity prices). Post-crisis: broad range of global asset prices highly correlated (U.S. inflation expectations, Treasury yields, U.S. NEER, risk aversion, equities, CDS, commodity prices) consistent with “risk-on/risk-off”.
- Increase in correlations occurred early in 2007; post-crisis correlations remained high through late-summer 2010 QE announcement and Q1 2011 (oil became less linked to other assets due to Middle East turmoil).

G. Robustness Checks
- Robustness to:
  - Changing crisis break from start-2007 to September 2008 (Lehman): relatively little impact on post-crisis coefficients; pre-crisis coefficients fall when break moved later.
  - Event window lengths of 2-, 5-, and 10-day: lengthening raises estimated typical bond and exchange rate links while lowering differential policy impacts; generalized fall in significance of policy announcements with longer windows. QE2 never found significant on global financial conditions across windows.

### V. CONCLUSIONS
- Underlying relationships across banking systems, bond yields, and exchange rates changed significantly pre- vs. post-crisis; policy impacts must be assessed against post-crisis high-correlated financial relationships.
- Financial policy spillovers depend on policy objective:
  - Fed swaps provided significant support to recipient foreign banking systems and improved global liquidity.
  - Tighter U.S. regulatory signaling (Volcker-rule speech) led to generalized falls in advanced-economy bank shares; emergence of potential competitive shifts benefiting conservative, well-capitalized banks in emerging markets and Japan.
  - Other Dodd-Frank aspects saw U.S. bank price falls accompanied by U.K./Swiss bank rises, implying perceived competitive advantages and regulatory arbitrage potential.
- Macro policies:
  - 2008/09 fiscal and monetary stimulus generally supported foreign activity.
  - 2010 fiscal stimulus associated with larger-than-typical rises in foreign bond yields (ambiguous spillovers).
  - QE1 had clear beneficial spillovers on emerging market yields, currencies, commodity prices, equities, and sovereign CDS; QE2 effects were more muted and its link to broad improvements in global financial conditions is difficult to establish via event studies.

### Tables and Key Quantitative Findings (selected exact figures preserved)
- Bank excess returns: Swiss pre-crisis beta .42 (.09)**; UK .13 (.05)*; Germany .23 (.09)*; UK post-crisis shift .37 (.08)** (Table 1a).
- Post-crisis bank spillovers: ~60 percent to Switzerland; 50 percent to U.K. and Germany; ~40, 30, 20 percent to France, Italy, Spain respectively (text summary).
- Foreign bond yields (Table 2a, basic): US 10 Year Yield coefficients:
  - Japan .16 (.02)**; Australia and Canada .66 (.02)**; Europe and Korea .39 (.02)**; China .01 (.02); Brazil/Mexico/South Africa/Turkey .69 (.07)**; Indonesia and Russia .53 (.05)**.
- Foreign bond yields including conditions (Table 2b): US 10 Year Yield:
  - Japan .16 (.03)**; Australia/Canada .63 (.03)**; Europe/Korea .33 (.03)**; China .18 (.06)**; Brazil group .85 (.06)**; Indonesia/Russia .74 (.12)**.
- Bilateral exchange rates (Table 3a): US 10 Year Yield coefficients (appreciation positive):
  - Japan -1.45 (.37)**; Australia/Canada -1.88 (.33)**; Europe/Korea -1.66 (.29)**; China .08 (.08); Brazil group -1.03 (.34)**; India/Indonesia/Russia -.05 (.13).
- Nominal effective exchange rates (Table 4a): US 10 Year Yield:
  - Japan -.90 (.31)**; Australia/Canada -1.04 (.25)**; Europe/Korea -.45 (.11)**; China .97 (.17)**; Brazil group -.02 (.30); India/Indonesia/Russia .94 (.18)**.
- Equity correlations (Table 5a): US equity return betas:
  - Japan .58 (.05)**; Australia/Canada .48 (.02)**; Europe/Korea .76 (.05)**; China .24 (.21); Brazil group .87 (.04)**; India/Indonesia/Russia .51 (.06)**.
- Macro indicators (Table 6a): US 10 Year Yield → US Inflation Expectation .28 (.02)**; VIX -.02 (.01); Foreign Equities .02 (.01)**; US Equities .03 (.01)**.
- Correlation structure (Table 7 pre-crisis sample extracts):
  - ΔUST10 correlated with ΔLT FFR Exp. 0.55; with ΔUS Infl. Exp. 0.49; with US Equities 0.16.
- Robustness: event-window lengthening increases typical link estimates but lowers policy differential significance (text summary).

*Source: _wp11183 - References (PDF), Data Annex and Tables provided in the source content.*

### References

### _wp11183 - References

### References
- Ait-Sahlia, Y., J.R. Andritzky, A. Jobst, S.B. Nowak, and N.T. Tamiris, 2009, “How to Stop a Heard of Running Bears? Market Response to Policy Initiatives during the Global Financial Crisis,” IMF Working Paper 09/204 (Washington: International Monetary Fund).
- Bayoumi, T. and T. Bui, 2011, “U.S. Financial Spillovers – Typical Advanced Country Responses,” United States 2011 Spillover Report – Selected Issues, pp. 3-4 (Washington: International Monetary Fund).
- Cook, T. and T. Hahn, 1989, “The effect of changes in the federal funds rate target on market interest rates in the 1970s,” Journal of Monetary Economics, Vol. 24, pp. 331-51.
- Diebold, F., and K. Yilmaz, 2009, ‘‘Measuring Financial Asset Return and Volatility Spillovers, with Application to Global Equity Markets,’’ Economic Journal, Vol. 119, (January), pp. 158–71.
- Ehrmann, M., M. Frazscher, and R. Rigobon, 2010, “Stocks, bonds, money markets and exchange rates: measuring international financial transmission,” Journal of Applied Econometrics, 26: n/a. doi: 10.1002/jae.1173
- Faust, J., J. Rogers, S. Wang, and J. Wright, 2007, “The High-Frequency Response of Interest Rates to Macroeconomic Announcements,” Journal of Monetary Economics, Vol. 54, pp. 1051-68.
- Gagnon, J., M. Raskin, J. Remache, and B. Sack, 2011, “The Financial Market Effects of the Federal Reserve’s Large-Scale Asset Purchases,” International Journal of Central Banking, Vol. 7, No. 1, pp. 1-43.
- Glick, R., and S. Leduc, 2011, “Are Large-Scale Asset Purchases Fueling the Rise in Commodity Prices?” Federal Reserve Bank of San Francisco Economic Letter, 2011-10. Available at http://www.frbsf.org/publications/economics/letter/2011/el2011-10.html.
- Ishii, Y., 2008, “International transmissions in US-Japanese stock markets,” Applied Financial Economics, Vol. 18, pp. 1193-1200.
- Laubasch, T., 2009, “New Evidence on the Interest Rate Effects of Budget Deficits and Debt,” Journal of the European Economic Association, Vol. 7, pp. 858-85.
- Neely, C.J., 2010, “The Large-Scale Asset Purchases Had Large International Effects,” Federal Reserve Bank of St. Louis Working Paper 2010-018C. Available at http://research.stlouisfed.org/wp/more/2010-018/.
- Poole, W., and R. Rasche, 2003, “The Impact of changes in FOMC disclosure practices on the transparency of monetary policy: are markets and the FOMC better ‘synched’?” Federal Reserve Bank of St. Louis Review, Issue Jan, pp. 1-10. Available at http://research.stlouisfed.org/publications/review/03/01/PooleRasche.pdf.
- Rigobon, R., and B. Sack, 2003, “Measuring the Reaction of Monetary Policy to the Stock Market,” Quarterly Journal of Economics, Vol. 118, No. 2, pp. 639–69.
- Rigobon, R., and B. Sack, 2004, “The Impact of Monetary Policy on Asset Prices,” Journal of Monetary Economics, Vol. 51, pp. 1553–75.
- Scott, A., 2011, “U.S. Growth Spillovers: Fiscal Policy,” United States 2011 Spillover Report – Selected Issues, pp. 37-42 (Washington: International Monetary Fund).
- Swiston, A., 2007, “Where Have All of the Monetary Surprises Gone? The Effects of FOMC Statements,” IMF Working Paper 07/185 (Washington: International Monetary Fund).
- Vissing-Jorgensen, A. and A. Krishnamurthy, February 10, 2011, “The Effects of Quantitative Easing on Interest Rates”. Available at SSRN: http://ssrn.com/abstract=1784270

### Data Sources and Event Descriptions

#### I. Data
- Coverage: daily data for the United States, Australia, Canada, the Euro area (including France, Germany, Italy, and Spain), Japan, Korea, Switzerland, and the United Kingdom (advanced economies); and Brazil, China, India, Indonesia, Mexico (only for the macro analysis), Russia, South Africa, and Turkey (emerging markets).
- Sample period: between 1/1/2003 and 4/8/2011.
- Note: Data availability is different across series and countries. Full database is available upon request.

- Stock market and banks’ equity indexes:
  - Source: DataStream.
  - Bank excess returns: calculated as the unweighted average of difference between banks’ return and their respective national stock market overall return.
  - Number of foreign banks included: fifty. The detailed list of banks is available upon request.

- Bond yields:
  - Source: Bloomberg.
  - For advanced countries, Korea, and India: generic 10-year government yields.
  - For emerging markets: calculated using the respective EMBIG spread and US 10-year yield.

- Exchange rates:
  - Bilateral dollar exchange rates from DataStream.
  - Nominal Effective Exchange Rate: calculated using the current INS Trade Weight matrix.

- Other series:
  - Effective Federal Fund rate, foreign central banks’ policy rates, the VIX and oil/commodity prices from Bloomberg.
  - Sovereign CDS series from Markit.
  - U.S. inflation expectation: calculated as the difference between the U.S. nominal 10-year yield and the corresponding inflation-indexed yield.
  - Fed Fund expectations: calculated using the formulas provided by Andrew Swiston (WHD) and Bloomberg data.

#### II. Event Dates
- Event date compilation: specific event dates provided by Andreas Jobst (MCM), Martin Sommer and Geoffrey Keim (WHD), and collected and classified by authors depending on type and timing of those events.
- Sources for particular event types:
  - Dodd-Frank Act dates: starting from the Obama’s “Volcker Rule” speech on January 21st, 2011, collected by authors.
  - Quantitative Easing event dates: collected and provided by Andreas Jobst (MCM) in conjunction with authors’ own assessment of other dates used by Federal Reserve Board economists.
  - Key U.S. Budget (Congress) and Fiscal (Administration) event dates: provided by Martin Sommer and Geoffrey Keim (WHD).
  - FOMC meetings (scheduled and emergency): available from Federal Reserve Board website http://www.federalreserve.gov/monetarypolicy/fomccalendars.htm.
  - Central Banks Liquidity Swap dates: provided by Andreas Jobst (MCM).

- Selected event list (some important events essential to analysis; full list available upon request):
  - Fiscal Stimulus 2008: 01/23/2008, 1/28/2008
  - Fiscal Stimulus 2009: 01/15/2009, 01/26/2009, 02/01/2010
  - Fiscal Stimulus 2010: 09/08/2010, 12/07/2010
  - Dodd-Frank Act: 01/21/2010, 05/20/2010, 06/25/2010, 07/15/2010, 07/21/2010
  - Quantitative Easing 1/: 11/25/2008, 12/16/2008, 01/28/2009, 03/18/2009, 04/29/2010
  - Quantitative Easing 2/: 08/10/2010, 08/27/2010, 09/21/2010, 11/03/2010

- Footnotes:
  - 1/ President’s FY2011 budget proposal with new stimulus measures including extensions of certain provisions in the Recovery Act (2009)
  - 2/ The so-called "Volcker Rule" speech by President Obama

*Source: _wp11183 - References*

---


_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/wp/2011/_wp11183.pdf_