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International transmission of financial stress: Evidence from a GVAR

Jonas Dovern () and Björn van Roye

No 1844, Kiel Working Papers from Kiel Institute for the World Economy (IfW)

Abstract: We analyze the international transmission of financial stress and its effects on economic activity. We construct country specific monthly financial stress indexes (FSI) using dynamic factor models from 1970 until 2012 for 20 countries. We show that there is a strong co-movement of the FSI during financial crises and that the FSI of financially open countries are relatively more correlated to FSI in other countries. Subsequently, we investigate the international transmission of financial stress and its impact on economic activity in a Global VAR (GVAR) model. We show that i) financial stress is quickly transmitted internationally, ii) financial stress has a lagged but persistent negative effect on economic activity, and iii) that economic slowdowns induce only limited financial stress.

Keywords: Financial stress; Financial crises; Business cycles; Dynamic Factor Model; Global VAR (search for similar items in EconPapers)
JEL-codes: E32 E52 F36 F37 F41 (search for similar items in EconPapers)
Date: 2013
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