Transmission Channels of Financial Shocks to Stock, Bond, and Asset-Backed Markets

An Empirical Model

Business & Finance, Finance & Investing, Corporate Finance, Finance
Cover of the book Transmission Channels of Financial Shocks to Stock, Bond, and Asset-Backed Markets by Massimo Guidolin, Viola Fabbrini, Manuela Pedio, Palgrave Macmillan UK
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Author: Massimo Guidolin, Viola Fabbrini, Manuela Pedio ISBN: 9781137561398
Publisher: Palgrave Macmillan UK Publication: November 12, 2015
Imprint: Palgrave Macmillan Language: English
Author: Massimo Guidolin, Viola Fabbrini, Manuela Pedio
ISBN: 9781137561398
Publisher: Palgrave Macmillan UK
Publication: November 12, 2015
Imprint: Palgrave Macmillan
Language: English

Researchers, policymakers and commentators have long debated the patterns through which adverse shocks in a few markets may quickly spread to a range of apparently disconnected financial markets causing widespread losses and turmoil. This book uses modern linear and non-linear econometric methods to characterize how shocks to the yield of risky fixed income securities, such as sub-prime asset-backed or low-credit rating sovereign bonds, are transmitted to the yields in other markets. These include equity and corporate bond markets as well as relatively risk-free fixed income securities, such as highly rated asset-backed securities and sovereign bonds from core Eurozone countries. The authors analyse and compare the results from linear and non-linear models to identify and assess four distinct contagion channels characterizing both US and European financial markets. These include the correlated information, risk premium, flight-to-liquidity, and flight-to quality channels. The results of this study support the theory that both investors and policy-makers ought to pay special attention to liquidity and commonalities in the perceptions of the probabilities of default, as channels through which financial shocks propagate.

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Researchers, policymakers and commentators have long debated the patterns through which adverse shocks in a few markets may quickly spread to a range of apparently disconnected financial markets causing widespread losses and turmoil. This book uses modern linear and non-linear econometric methods to characterize how shocks to the yield of risky fixed income securities, such as sub-prime asset-backed or low-credit rating sovereign bonds, are transmitted to the yields in other markets. These include equity and corporate bond markets as well as relatively risk-free fixed income securities, such as highly rated asset-backed securities and sovereign bonds from core Eurozone countries. The authors analyse and compare the results from linear and non-linear models to identify and assess four distinct contagion channels characterizing both US and European financial markets. These include the correlated information, risk premium, flight-to-liquidity, and flight-to quality channels. The results of this study support the theory that both investors and policy-makers ought to pay special attention to liquidity and commonalities in the perceptions of the probabilities of default, as channels through which financial shocks propagate.

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