What Drives Euro Area Financial Market Developments? The Role of US Spillovers and Global Risk

57 Pages Posted: 1 Jun 2021

See all articles by Lennart Brandt

Lennart Brandt

Bank of England

Arthur Saint Guilhem

European Central Bank (ECB)

Maximilian Schröder

BI Norwegian Business School - Department of Economics

Ine Van Robays

European Central Bank

Date Written: May 1, 2021

Abstract

Financial asset prices contain a rich set of real-time information on the economy. To extract this information, it is crucial to understand the driving factors behind financial market developments. In this paper, we exploit daily cross-asset price movements in a sign-restricted BVAR model to analyse the extent to which euro area and US yields, equity prices, and the euro-US dollar exchange rate are jointly driven by monetary policy, macro and global risk factors. A novelty is that we allow for cross-Atlantic spillovers while also accounting for the unique role of the US in the global financial system. Our results underline the importance of US spillovers and shifts in global risk sentiment for understanding the dynamics of euro area financial variables. Euro area shocks transmit much less to US financial markets in comparison, with global risk shocks being more important instead. Using the daily shocks as instruments in a Proxy-SVAR, we demonstrate that the transmission of financial market movements to the macroeconomy depends on the underlying driver, thereby illustrating why it matters to look into the driving factors in the first place.

JEL Classification: C32, C54, E44, E52

Suggested Citation

Brandt, Lennart and Guilhem, Arthur Saint and Schröder, Maximilian and Van Robays, Ine, What Drives Euro Area Financial Market Developments? The Role of US Spillovers and Global Risk (May 1, 2021). ECB Working Paper No. 2021/2560, Available at SSRN: https://ssrn.com/abstract=3855932

Lennart Brandt (Contact Author)

Bank of England ( email )

Threadneedle Street
London, EC2R 8AH
United Kingdom

Arthur Saint Guilhem

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Maximilian Schröder

BI Norwegian Business School - Department of Economics ( email )

Nydalsveien 37
Oslo, 0484
Norway

HOME PAGE: http://https://maximilianschroeder.github.io/

Ine Van Robays

European Central Bank ( email )

Kaiserstrasse 29
Frankfurt am Main, 60311
Germany
+496913446179 (Phone)

HOME PAGE: http://https://sites.google.com/site/inevanrobays/

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