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Federal Reserve Bank of San Francisco
Working Paper Series
Global Financial Cycles and Risk Premiums
Oscar Jorda
Moritz Schularick
Alan M. Taylor
Felix Ward
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. 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 U.S. 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.


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Oscar Jorda & Moritz Schularick & Alan M. Taylor & Felix Ward, Global Financial Cycles and Risk Premiums, Federal Reserve Bank of San Francisco, Working Paper Series 2018-5, 11 Jun 2018.
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DOI: 10.24148/wp2018-05
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