Appendix 4.C Data description and results
5.7 The role of safe havens in shock propagation
5.7.1 Sovereign bond yield shock
To distill the unique role of safe havens, we need to construct a “no-safe havens” counterfactual network that we can compare against our actual network. For our “no-safe havens” counterfac-tual network, we replace all the safe havens’ correlations with average correlations of non-safe haven countries (for bank-sovereign links alone, or in a separate experiment for sovereign-sovereign, bank-bank, and bank-sovereign links) as if they were the average non-safe haven country. Then we repeat the shock propagation exercises and compare with the results for the actual network.
Figs 5.7 and 5.8 show the role of safe havens in the propagation of sovereign bond shocks in the Fragile Five and the GIIPS. We measure the impact of a shock in a network without safe havens (one in which all safe haven correlations have been replaced with non-safe haven average correlations (continuous line)) against a baseline of the actual network of correlations. A line below 1 indicates that shocks propagate more strongly in a network with safe havens than in one without safe havens: the destabilizing effect of safe havens’ first characteristic predominates.
To distil separately the stabilizing effect of safe havens, we compare the same baseline of actual correlations against another counterfactual (dotted line) in which only bank-sovereign correlations of safe havens have been replaced with average non-safe haven correlations but all sovereign-sovereign and bank-bank correlations remain actual correlations. A dotted line above 1 indicates that the bank-sovereign links of safe havens dampen the propagation of shocks. In all our scenarios, shocks eventually propagate faster in networks with safe havens than without
Figure 5.6: Distribution of bilateral correlations for safe havens and non-safe havens.
Between sovereigns
0 0,1 0,2 0,3 0,4 0,5 0,6 0,7 0,8
-0,3 -0,1 0,1 0,3 0,5 0,7 0,9
Fraction of countries
Correlation coefficient
Between banks
0 0,1 0,2 0,3 0,4 0,5 0,6 0,7 0,8
-0,9 -0,7 -0,5 -0,3 -0,1 0,1 0,3 0,5 0,7 0,9
Fraction of countries
Correlation coefficient
Between sovereigns and banks
0 0,1 0,2 0,3 0,4 0,5 0,6 0,7 0,8
-0,3 -0,1 0,1 0,3 0,5 0,7 0,9
Fraction of countries
Correlation coefficient Non-Safe Havens Safe Havens
(a) Years 2000-2006 Between sovereigns
0 0,1 0,2 0,3 0,4 0,5 0,6 0,7 0,8
-0,5 -0,3-0,1 0,1 0,3 0,5 0,7 0,9
Fraction of countries
Correlation coefficient
Between banks
0 0,1 0,2 0,3 0,4 0,5 0,6 0,7 0,8
-0,4 -0,2 0 0,2 0,4 0,6 0,8 1
Fraction of countries
Correlation coefficient
Between sovereigns and banks
0 0,1 0,2 0,3 0,4 0,5 0,6 0,7 0,8
-0,3 -0,1 0,1 0,3 0,5 0,7 0,9
Fraction of countries
Correlation coefficient Non-Safe Havens Safe Havens
(b) Years 2007-2009 Between sovereigns
0 0,1 0,2 0,3 0,4 0,5 0,6 0,7 0,8
-0,4 -0,2 0 0,2 0,4 0,6 0,8 1
Fraction of countries
Correlation coefficient
Between banks
0 0,1 0,2 0,3 0,4 0,5 0,6 0,7 0,8
-0,8 -0,6 -0,4 -0,2 0 0,2 0,4 0,6 0,8 1
Fraction of countries
Correlation coefficient
Between sovereigns and banks
0 0,1 0,2 0,3 0,4 0,5 0,6 0,7 0,8
-0,5 -0,3-0,1 0,1 0,3 0,5 0,7 0,9
Fraction of countries
Correlation coefficient Non-Safe Havens Safe Havens
(c) Years 2010-2012 Between sovereigns
0 0,1 0,2 0,3 0,4 0,5 0,6 0,7 0,8
-0,3 -0,1 0,1 0,3 0,5 0,7 0,9
Fraction of countries
Correlation coefficient
Between banks
0 0,1 0,2 0,3 0,4 0,5 0,6 0,7 0,8
-0,5 -0,3-0,1 0,1 0 0,5 0,7 0,9
Fraction of countries
Correlation coefficient
Between sovereigns and banks
0 0,1 0,2 0,3 0,4 0,5 0,6 0,7 0,8
-0,6 -0,4 -0,2 0 0,2 0,4 0,6 0,8 1
Fraction of countries
Correlation coefficient Non-Safe Havens Safe Havens
(d) Year 2013
5.7. THE ROLE OF SAFE HAVENS IN SHOCK PROPAGATION
Figure 5.7: Average impact of Fragile Five sovereign bond shock without safe havens (in multi-ples of average impact of Fragile File bond market shock in the actual network of correlations).
0,5 0,7 0,9 1,1 1,3 1,5 1,7 1,9 2,1 2,3 2,5
step1 step2 step3 step4 step5 step6 step7 step8 step9 step10
Average impact
Steps
2012, all sov-sov/bank-bank/bank-sov correlations in safe havens replaced with non-safe haven average
2010-12, only bank-sov correlations of safe havens replaced with no-safe haven average
Destabilizing Stabilizing
(a) Fragile Five sovereign bond shock in 2010-12
0,5 0,7 0,9 1,1 1,3 1,5 1,7 1,9 2,1 2,3 2,5
step1 step2 step3 step4 step5 step6 step7 step8 step9 step10
Average impact
Steps
2013, all sov-sov/bank-bank/bank-sov correlations in safe havens replaced with non-safe haven average
2013,only bank-sov correlations of safe havens replaced with no-safe haven average
(b) Fragile Five sovereign bond shock in 2013
Note: The upper limit of the band indicates the impact when only bank-sovereign correlations are replaced for safe havens by sample averages; the lower limit indicates the impact when all correlations for safe havens are replaced by sample averages.
Figure 5.8: Average impact of GIIPS sovereign bond shock without safe havens (in multiples of average impact of GIIPS market shock in the actual network of correlations).
0,5 0,7 0,9 1,1 1,3 1,5 1,7 1,9 2,1 2,3 2,5
step1 step2 step3 step4 step5 step6 step7 step8 step9 step10
Average impact
Steps 2012, all sov-sov/bank-bank/bank-sov correlations in safe havens replaced with non-safe haven average
2010-12, only bank-sov correlations of safe havens replaced with no-safe haven average
Destabilizing Stabilizing
(a) GIIPS sovereign bond shock in 2010-12
0,5 0,7 0,9 1,1 1,3 1,5 1,7 1,9 2,1 2,3 2,5
step1 step2 step3 step4 step5 step6 step7 step8 step9 step10
Average impact
Steps
2013, all sov-sov/bank-bank/bank-sov correlations in safe havens replaced with non-safe haven average
2013,only bank-sov correlations of safe havens replaced with no-safe haven average
(b) GIIPS sovereign bond shock in 2013
Note: The upper limit of the band indicates the impact when only bank-sovereign correlations are replaced for safe havens by sample averages; the lower limit indicates the impact when all correlations for safe havens are replaced by sample averages.
5.7. THE ROLE OF SAFE HAVENS IN SHOCK PROPAGATION safe havens (the continuous lines are eventually below 1). Not surprisingly, the larger group of safe havens in 2010-12 than in 2013 results in stronger effects in 2010-12 than in 2013.
The stabilizing effects of safe havens take time to gather momentum after a sovereign bond shock. A sovereign bond shock spreads rapidly and strongly across the highly interconnected sovereign bond network. In contrast, the stabilizing bank-sovereign effect in safe havens only operates once a shock hits either a safe haven banking system or a safe haven sovereign.
The stabilizing effect of safe havens depends on the origin of the shock. For example, in 2010-12, the stabilizing effect emerged more strongly and faster if the shock originated in the GIIPS than in the Fragile Five. Because GIIPS sovereign bond yields were on average one-third more strongly correlated with safe haven sovereign bond yields than Fragile Five sovereign bond yields, a sovereign shock originating in the GIIPS reached safe havens more strongly. This also triggered stronger stabilizing bank-sovereign links in safe havens.