Stocks, bonds, money markets and exchange rates: measuring international financial transmission

TLDR

Financial transmission across domestic and cross‑asset classes requires simultaneous modeling of multiple channels within a single comprehensive empirical framework. The study estimates financial transmission between money, bond, equity markets and exchange rates in the USA and euro area. The authors use a comprehensive empirical framework that models direct and indirect spillovers through other asset prices, revealing amplified international shock transmission within asset classes. Asset prices react most strongly to domestic shocks, yet substantial international spillovers exist; US markets explain roughly 30 % of euro area movements while euro area markets account for only about 6 % of US changes, and indirect spillovers through other asset prices further increase international transmission within asset classes. © 2010 John Wiley & Sons, Ltd.

Abstract

Understanding the complexity of the financial transmission process across various assets—domestically as well as within and across asset classes—requires the simultaneous modeling of the various transmission channels in a single, comprehensive empirical framework. The paper estimates the financial transmission between money, bond and equity markets and exchange rates within and between the USA and the euro area. We find that asset prices react strongest to other domestic asset price shocks, but that there are also substantial international spillovers, both within and across asset classes. The results underline the dominance of US markets as the main driver of global financial markets: US financial markets explain, on average, around 30% of movements in euro area financial markets, whereas euro area markets account only for about 6% of US asset price changes. Moreover, the methodology allows us to identify indirect spillovers through other asset prices, which are found to increase substantially the international transmission of shocks within asset classes. Copyright © 2010 John Wiley & Sons, Ltd.