Determinants of Financial Market Spillovers: The Role of Portfolio Diversification, Trade, Home Bias, and Concentration

October 17, 2014

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Yoko Shinagawa. Determinants of Financial Market Spillovers: The Role of Portfolio Diversification, Trade, Home Bias, and Concentration, (USA: International Monetary Fund, 2014) accessed September 18, 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

This paper defines financial market spillovers as the comovement between two countries’ financial markets and analyzes financial market spillovers over the period 2001-12 through four channels: bilateral portfolio investment, bilateral trade, home bias, and country concentration. The paper finds that, if a country has a large amount of bilateral portfolio exposure in another country, these two countries’ comovement of bond yields are large. Also, countries’ geographical preferences impact financial spillovers; if a country has a stronger home bias, the country could have less spillovers from foreign financial markets. A policy implication from this result is that, if countries become less home-biased and have a greater amount of portfolio investment assets, they should strengthen prudential regulations to mitigate against rising risks of financial spillovers (or risk greater volatility owing to comovement with foreign markets).

Subject: Balance of payments, Financial institutions, Financial markets, Financial sector policy and analysis, Portfolio investment, Securities, Spillovers, Stock markets, Stocks

Keywords: Asset holding, Coordinated Portfolio Investment Survey (CPIS), Correlation vis-à-vis, Financial market spillover, Financial Spillover, Global, Heightened market instability, Home Bias, Market, Market contagion, Portfolio inflow, Portfolio investment, Securities, Spillovers, Stock markets, Stocks, WP

Publication Details

Pages:

24
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2014/187
Stock No:

WPIEA2014187
ISBN:

9781498365628
ISSN:

1018-5941

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