Investors’ Risk Appetite and Global Financial Market Conditions

Author/Editor:

Brenda Gonzalez-Hermosillo

Publication Date:

April 1, 2008

Electronic Access:

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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:

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.

Series:

Working Paper No. 2008/085

Subject:

Emerging and frontier financial markets Financial crises Liquidity Liquidity risk Yield curve

English

Publication Date:

April 1, 2008

ISBN/ISSN:

9781451869460/1018-5941

Stock No:

WPIEA2008085

Pages:

75

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