Template-Type: ReDIF-Paper 1.0
Author-Name: Zalán Kocsis
Author-X-Name-First: Zalán
Author-X-Name-Last: Kocsis
Author-Email: kocsisz@mnb.hu
Author-Workplace-Name: Magyar Nemzeti Bank (central bank of Hungary)
Title: Global, Regional and Country-Specific Components of Financial Market Indicators: An Extraction Method and Applications
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.
Length: 46 pages
Creation-Date: 2013
File-URL: http://www.mnb.hu/letoltes/wp-2013-03-final-1.pdf
File-Format: Application/pdf
Number: 2013/3
Classification-JEL: G15, C38, E44
Keywords: variance decomposition, factor analysis, Procrustes rotation, spillover, cross-country correlations, cross-asset correlations
Handle: RePEc:mnb:wpaper:2013/3