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

By Franziska L Ohnsorge, Marcin Wolski, Yuanyan S Zhang

May 9, 2014

Preview Citation

Format: Chicago

Franziska L Ohnsorge, Marcin Wolski, and Yuanyan S Zhang. Safe Havens, Feedback Loops, and Shock Propagation in Global Asset Prices, (USA: International Monetary Fund, 2014) accessed November 23, 2024

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

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.

Subject: Asset prices, Banking, Bond yields, Financial crises, Financial institutions, Global financial crisis of 2008-2009, Prices, Sovereign bonds, Stocks

Keywords: Asia and Pacific, Asset prices, Bank-bank correlation, Banks, Bond yields, Equity price, Europe, Feedback loops, Global, Global financial crisis of 2008-2009, Muted sovereign bond yield spike, North America, Sovereign bond bond yield, Sovereign bond yield correlation, Sovereign bond yield network, Sovereign bond yield shock, Sovereign bond yield spike, Sovereign bonds, Sovereigns, Stocks, WP, Yield spike

Publication Details

Pages:

45
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2014/081
Stock No:

WPIEA2014081
ISBN:

9781484381588
ISSN:

1018-5941

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