Global, regional, and country-specific components of financial market indicators

Zalan Kocsis

Acta Oeconomica, 2014, vol. 64, issue supplement1, 81-110

Abstract: This paper studies the global, regional, and country-specific components of four key financial market indicators: sovereign CDS spreads, equity indices, exchange rates, and EMBI Global bond spreads. In all four markets, the results support the findings of the literature of a significant global component, but also point out the importance of regional correlations. Variance decompositions point to roughly a third of variance explained by both global and country-specific components in each of the four analysed financial markets, although there is considerable cross-country heterogeneity in this respect. The global factors of indicators are correlated across asset classes, but the market- and country-specific components of indicators are still significantly large to suggest diversification benefits of both multi-asset and multi-country portfolios. An application of the factor model suggests that the link between Central Eastern European and Euro zone periphery markets is stronger and more direct in the case of equity indices than in the case of sovereign CDS spreads.

Keywords: variance decomposition; factor analysis; Procrustes rotation; spillover; cross-country correlations; cross-asset correlations (search for similar items in EconPapers)
JEL-codes: C38 E44 G15 (search for similar items in EconPapers)
Date: 2014
Note: I would like to thank Martín Saldias and Levente Pápa for being discussants of previous versions and the comments of the two anonymous referees of the current publication. I am also grateful for suggestions and support by colleagues at MNB, in particular, Csaba Csávás, Szilárd Erhart, Dániel Horváth, and Norbert M. Kiss, as well as for the comments of András Fülöp and Zoltán Reppa. The paper benefited from comments of experts of the national central
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