Global financial conditions and asset markets: Evidence from fragile emerging economies

- We study global financial effects on fragile emerging economy asset markets.
- Global financial risk shocks significantly affect the asset markets.
- The effects differ by country and asset class.
- The shocks have a larger immediate impact on bond yields and CDS spreads.
- Macroeconomic fundamentals drive the country differentiations.

This study examines the effects of global financial conditions on the asset markets of five fragile emerging economies-Brazil, India, Indonesia, South Africa, and Turkey-known as the Fragile Five. We estimate a structural vector autoregressive model with a block exogeneity procedure using high-frequency daily data and Bayesian inference. Our primary findings are as follows. (i) Global financial risk shocks have significant effects on government bond yields, equity prices, CDS spreads, and exchange rates in the Fragile Five. (ii) The effects differ considerably across the fragile countries and the assets. (iii) These country differentiations are strongly related to macroeconomic fundamentals. Finally, (iv) global financial risk shocks have a greater immediate effect on local currency government bond and CDS markets than on FX and stock markets.