Global, Regional and Country-Specific Components of Financial Market Indicators: An Extraction Method and Applications

Zalan Kocsis

No 2013/3, MNB Working Papers from Magyar Nemzeti Bank (Central Bank of Hungary)

Abstract: This paper presents a variance decomposition method - factor analysis with Procrustes rotation - that is capable of separating the global, regional and idiosyncratic components of various financial market indicators. The method is applied to indicators of five key financial markets: sovereign CDS spreads, stock indices, exchange rates, EMBI Global bond spreads and 10-year reference yields of domestic government bond markets. The results support the finding of the literature of a significant global component in most markets, but also point out the importance of regional correlations. Based on the method two practical applications are proposed: one, which is useful in the daily monitoring of financial markets to identify magnitudes of risk premium shocks of global, regional and country-specific origins; and another one, which gauges channels of risk propagation from the eurozone periphery.

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)
Pages: 46 pages
Date: 2013
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:mnb:wpaper:2013/3

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