How Global is the Domestic Financial Cycle? Evidence from Romania and 3 other EEMS

Andreea Muraru,Cristina Bejenaru

doi:10.5171/2022.121344

Abstract

This paper provides an analysis of the potential common influences behind the synchronicity of financial cycles in four EEMS: Romania, Hungary, Poland and the Czech Republic. We checked if the common movements in these EEMS appear under the influence of the global financial cycle measured in terms of quantities - through capital flows - risk premiums and global risk aversion for investors.

Highlights

Over the past few decades, the domestic financial cycles have become more and more synchronized, making way for a stream of literature that investigates the common movement of financial cycles and their connection with the global financial cycle (Rey, 2015)
Our results indicate that the major impact on the dynamics of the common movement in the domestic financial cycles is arising from the capital flow measure of the global financial cycle, followed by the risk premium and lastly from the VIX
We considered the following variables characteristic for the financial cycle: 10 year government bond yields, equity prices, house price index, total credit to GDP ratio and two measures of the global financial cycle – the global capital flows as share in GDP and the VIX index as measure of global risk aversion

Summary

Introduction

Over the past few decades, the domestic financial cycles have become more and more synchronized, making way for a stream of literature that investigates the common movement of financial cycles and their connection with the global financial cycle (Rey, 2015). Journal of Financial Studies & Research the literature proved that the effects of the global financial cycle are more intense and visible lately and have a major impact over domestic financial cycles. The main objective is to identify how the global financial cycle (measured in quantity terms as in Borio, 2019, Habib and Venditti, 2019), investors’ global risk aversion (measured by the VIX index), and risk premium (measured by the CDS – credit default swap) affect in the evolution of the analyzed domestic financial cycles

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Conclusion