Investors’ Risk Appetite and Global Financial Market Conditions

A structural vector autoregression model is developed to analyze the dynamics of bond spreads among a sample of mature and developing countries during periods of financial stress in the last decade. The model identifies and quantifies the contribution on bond spreads from global market conditions (including funding liquidity, market liquidity, as well as credit and volatility risks), contagion effects, and idiosyncratic factors. While idiosyncratic factors explain a large amount of the changes in bond spreads over the sample, global market risk factors are fundamental driving forces during periods of stress. The relative importance of the different risk factors changes substantially depending on the crisis episode. Contagion from emerging markets becomes small or non-existent when global financial market risks explicitly are taken into account.Bond issues;Financial risk;Spillovers;Economic models;financial markets, bond, global financial markets, bond spreads, financial market, global financial market, global market, bond spread, bonds, stock market, treasury bond, sovereign bond, equity markets, global financial system, financial system, corporate bond, financial stability, stochastic discount factor, stochastic discount, financial contagion, treasury bonds, bond indices, bond yield, stock exchange, asset markets, corporate bonds, global financial stability, interest rate risk, sovereign bonds, bond markets, foreign exchange, hedge, capital markets, government bond, emerging market bond, international finance, financial instruments, stock markets, market bond, corporate bond indices, international financial, bond returns, global ? market, international capital, derivatives markets, new york stock exchange, equity market, global bond, hedge fund, hedge funds, global markets, global financial crises, international bond markets, investment grade corporate bonds, bond rates, futures markets, eurobonds, financial market development, global financial crisis, global liquidity, global financial factors, stock returns, liquid asset, bond market, liquid markets, hedging, bond index, brady bonds, globalization, international capital markets, liquidity funding, international financial contagion, financial innovation, international bond, emerging market bonds, risk-free interest rate