Essay on spillovers from advanced economics (AE) to emerging economics (EM) during the global financial crisis

Abstract

Purpose The purpose of this paper is to estimate the bond market linkages between emerging markets (EM) and advanced markets (AM) yields by estimating yield equations for EMs as a function of AM yields and illustrating the quantitative macroeconomic effects on EMs of global yield shocks in a multi-country dynamic stochastic general equilibrium modeling model. Design/methodology/approach The research used a monthly sample of 45 advanced and EM economies covering the period 1998Q1 to 2010Q6. In this paper, the authors have shown that, indeed, there is a spillover effect from AD to EM countries and that most transmission channels, although they vary in significance, are all economically relevant. The main results of the paper underline the importance of international spillover across countries in the financial market. The strongest international transmission of shocks to EM is from the USA and the UK. Findings The authors find evidence that shocks in the volatility index and commodity fuels have a positive and significant impact on EM bond yield. Moreover, shocks in three-month US treasury bills, credit default swap, the London gold price and the Brent petrol price have a significant negative impact on EM bond yield. Finally, the result shows that global external shocks are found to be significant in determining bond yield and causing spillover into the EM. Originality/value These findings are especially important for policy makers in understanding the transmission of shocks in the bond market across different countries, as well as for risk management.