Financial crisis and a transmission mechanism of external shocks: The signaling role of the Korean Monetary Stabilization Bond

► We investigate the signaling role of the MSB spread during the recent financial crisis. ► Short-term capital flows transmit exogenous shocks via foreign reserves channel. ► A negative impact on foreign reserves is a major risk to domestic financial markets. ► The MSB spread is a signal to capture short-term capital and foreign reserve shock.