Investors’ Risk Appetite and Global Financial Market Conditions

April 1, 2008

Preview Citation

Format: Chicago

Brenda Gonzalez-Hermosillo. Investors’ Risk Appetite and Global Financial Market Conditions, (USA: International Monetary Fund, 2008) accessed November 8, 2024

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

A structural vector autoregression model is developed to analyze the dynamics of bond spreads among a sample of mature and developing countries during periods of financial stress in the last decade. The model identifies and quantifies the contribution on bond spreads from global market conditions (including funding liquidity, market liquidity, as well as credit and volatility risks), contagion effects, and idiosyncratic factors. While idiosyncratic factors explain a large amount of the changes in bond spreads over the sample, global market risk factors are fundamental driving forces during periods of stress. The relative importance of the different risk factors changes substantially depending on the crisis episode. Contagion from emerging markets becomes small or non-existent when global financial market risks explicitly are taken into account.

Subject: Emerging and frontier financial markets, Financial crises, Liquidity, Liquidity risk, Yield curve

Keywords: Federal funds rate, Liquidity crisis, Market liquidity, Risk appetite, Subprime mortgage, WP

Publication Details

Pages:

75
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2008/085
Stock No:

WPIEA2008085
ISBN:

9781451869460
ISSN:

1018-5941

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