What drives euro area financial markets? The role of US spillovers and global risk

Lennart Brandt, Arthur Saint Guilhem, Maximilian Schröder and Ine Van Robays

No 2560, Working Paper Series from European Central Bank

Abstract: Understanding euro area financial market dynamics requires looking beyond borders. We introduce a novel Bayesian structural VAR model designed to jointly estimate the main drivers of euro area financial asset prices on a daily basis. The model explicitly accounts for transatlantic spillovers and the distinctive influence of the United States, particularly through its monetary policy and its role as a safe haven during periods of heightened risk aversion. The results show that euro area financial markets are influenced by a complex interplay of domestic factors, US influences, and global risk shocks, which can either amplify or mitigate financial dynamics at home. These significant spillovers can pose substantial challenges for monetary policy, particularly amidst economic and monetary policy divergence. JEL Classification: C32, C54, E44, E52

Keywords: financial markets; global risk; international spillovers; monetary policy; Structural VAR (search for similar items in EconPapers)
Date: 2021-05
New Economics Papers: this item is included in nep-cba, nep-cwa, nep-eec, nep-fdg and nep-mac
Note: 688159
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (6)

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Persistent link: https://EconPapers.repec.org/RePEc:ecb:ecbwps:20212560

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