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

Franziska Ohnsorge, Marcin Wolski and Yuanyan Zhang

No 2014/081, IMF Working Papers from International Monetary Fund

Abstract: We create a network of bilateral correlations of changes in sovereign bond yields and individual bank equity price changes since 2000. We extract some stylized facts from this network of asset price correlations and document the clear differences in asset price correlations between safe havens and non-safe havens: safe havens, as commonly defined, have higher sovereign-sovereign, bank-bank, and bank-sovereign correlations than nonsafe havens. In a simple shock propagation model, we illustrate how these higher correlations may turn safe havens into shock propagators. While we discuss safe havens as a group, we document how the US is in a category of its own, differing significantly from the other countries including Switzerland or Japan. Separately, we find that feedback loops amplify shocks, and those emanating from bank stress more than those emanating from sovereign stress.

Keywords: WP; sovereign bond bond yield; equity price; bank-bank correlation; sovereign bond yield shock; muted sovereign bond yield spike; sovereign bond yield correlation; sovereign bond yield spike; yield spike; Feedback loops; Sovereigns; Banks; sovereign bond yield network; Bond yields; Sovereign bonds; Stocks; Asset prices; Global financial crisis of 2008-2009; Global; Europe; North America; Asia and Pacific (search for similar items in EconPapers)
Pages: 45
Date: 2014-05-09
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Citations: View citations in EconPapers (2)

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