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

IMF Working Papers, May 9, 2014

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

Authors: Franziska L Ohnsorge, Marcin Wolski, Yuanyan S Zhang
Date: May 9, 2014
Core objective: Create a network of bilateral correlations of changes in sovereign bond yields and individual bank equity price changes since 2000 and extract stylized facts about safe havens, shock propagation, and feedback loops.

Safe havens, as commonly defined, have higher sovereign-sovereign, bank-bank, and bank-sovereign correlations than nonsafe havens.
In a simple shock propagation model, higher correlations can cause safe havens to act as shock propagators.
The United States is in a category of its own and differs significantly from other countries often classified as safe havens (including Switzerland or Japan).
Feedback loops amplify shocks, and shocks emanating from bank stress are amplified more than those emanating from sovereign stress.

Construct a network of bilateral correlations between:
- changes in sovereign bond yields
- individual bank equity price changes
Time span: since 2000
Use the network to extract stylized facts and to illustrate shock propagation in a simple model.

Safe havens exhibit:
- higher sovereign-sovereign correlations
- higher bank-bank correlations
- higher bank-sovereign correlations
Clear differences exist in asset price correlations between safe havens and non-safe havens.

Shock propagation model findings:
- Higher correlations can turn safe havens into shock propagators.
Feedback loop findings:
- Feedback loops amplify shocks.
- Amplification is stronger for shocks originating from bank stress than for shocks originating from sovereign stress.

Subject: Asset prices, Banking, Bond yields, Financial crises, Financial institutions, Global financial crisis of 2008-2009, Prices, Sovereign bonds, Stocks
Keywords include: Asia and Pacific, Asset prices, bank-bank correlation, Banks, Bond yields, equity price, Europe, Feedback loops, Global, Global financial crisis of 2008-2009, muted sovereign bond yield spike, North America, sovereign bond bond yield, sovereign bond yield correlation, sovereign bond yield network, sovereign bond yield shock, sovereign bond yield spike, Sovereign bonds, Sovereigns, Stocks, WP, yield spike

_wp1481 — Appendix I: Shock Propagation Mechanism
- _wp1481 — Appendix I: Shock Propagation Mechanism (Markdown version)
- _wp1481 — Appendix I: Shock Propagation Mechanism (PDF)