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IMF Economic Review

, Volume 67, Issue 1, pp 109–150 | Cite as

Global Financial Cycles and Risk Premiums

  • Òscar JordàEmail author
  • Moritz Schularick
  • Alan M. Taylor
  • Felix Ward
Research Article
  • 55 Downloads

Abstract

This paper studies the synchronization of financial cycles across 17 advanced economies over the past 150 years. The comovement in credit, house prices, and equity prices has reached historical highs in the past three decades. While comovement of credit and house prices increased in line with growing real sector integration, comovement of equity prices has increased above and beyond growing real sector integration. The sharp increase in the comovement of global equity markets is particularly notable. We demonstrate that fluctuations in risk premiums, and not risk-free rates and dividends, account for a large part of the observed equity price synchronization after 1990. We also show that US monetary policy has come to play an important role as a source of fluctuations in risk appetite across global equity markets. These fluctuations are transmitted across both fixed and floating exchange rate regimes, but the effects are more muted in floating rate regimes.

Keywords

Financial cycles Asset prices Equity return premium Policy spillovers Financial centers 

JEL Classification

E50 F33 F42 F44 G12 N10 N20 

Notes

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Copyright information

© International Monetary Fund 2019

Authors and Affiliations

  • Òscar Jordà
    • 1
    • 2
    Email author
  • Moritz Schularick
    • 3
    • 4
  • Alan M. Taylor
    • 4
    • 5
    • 6
  • Felix Ward
    • 7
  1. 1.Federal Reserve Bank of San FranciscoSan FranciscoUSA
  2. 2.Department of EconomicsUniversity of CaliforniaDavisUSA
  3. 3.Department of EconomicsUniversity of BonnBonnGermany
  4. 4.Center of Economic Policy ResearchLondonUK
  5. 5.Graduate School of Management and Department of EconomicsUniversity of CaliforniaDavisUSA
  6. 6.National Bureau of Economic Research CambridgeUSA
  7. 7.Erasmus School of EconomicsErasmus University Rotterdam RotterdamThe Netherlands

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