International financial transmission: emerging and mature markets

Guillermo Felices (), Christian Grisse () and Jing Yang ()
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Guillermo Felices: Citigroup
Jing Yang: Bank of England, Postal: Publications Group Bank of England Threadneedle Street London EC2R 8AH

No 373, Bank of England working papers from Bank of England

Abstract: With an increasingly integrated global financial system, we frequently observe that shocks to individual asset markets affect financial markets worldwide. The aim of this paper is to quantify the comovements between bond markets in the US and emerging market economies using daily data from prior to the East Asian crisis through to the early stages of the current global financial crisis. We exploit the changing volatility of the data to fully identify a structural VAR, without imposing ad hoc restrictions. We find that shocks that widen emerging market sovereign debt (EMBIG) spreads have a negative effect on US interest rates in the short run (consistent with 'flight to quality' effects), while shocks that increase US interest rates raise EMBIG spreads over longer horizons (consistent with 'financing cost' or 'search for yield' effects). We also find that shocks that increase EMBIG spreads tend to widen US high-yield spreads and vice versa, constituting an important contagion channel through which crises in emerging market economies can affect mature markets. Forecast error variance decompositions show that shocks to US long rates can explain around 60%-70% of the variation of EMBIG and US high-yield spreads.

JEL-codes: C32 F30 G15 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cba and nep-sea
Date: 2009-08-24
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Persistent link: http://EconPapers.repec.org/RePEc:boe:boeewp:0373

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