Global liquidity, market sentiment, and financial stability indices

Abstract

This paper investigates the determinants of global liquidity, measured using BIS data on cross-border claims of banks (bank flows) in a sample of 149 countries. The paper identifies links between global liquidity and a variety of market sentiment and financial stability indices. Using panel regressions incorporating country fixed effects, I find that the CBOE Volatility Index (VIX), FRED and Bloomberg financial stability indices, the U.S. Conference Board Leading Economic Index, the U.S. IDB/TIPP Economic Optimism Index, and KBW indices all appear relevant in capturing the magnitude of changes in cross-border global liquidity. Additionally, I corroborate previous empirical evidence that bank conditions and monetary policy in important financial centers, and in particular in the U.S., remain highly significant in determining cross-border bank flows. The results are robust to changes in the estimation methodology and varying sets of the control variables.