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Cover Global Financial Stability Notes
Cryptic Connections: Spillovers between Crypto and Equity Markets
Tara Iyer
Crypto assets have emerged as an increasingly popular asset class among retail and institutional investors. Although initially considered a fringe asset class, their increased adoption across countries—in emerging markets, in particular—amid bouts of extreme price volatility has raised concerns about their potential financial stability implications. This note examines the extent to which crypto assets have moved to the mainstream by estimating the potential for spillovers between crypto and equity markets in the United States and in emerging markets using daily data on price volatility and returns. The analysis suggests that crypto and equity markets have become increasingly interconnected across economies over time. Spillovers from price volatility of the oldest and most popular crypto asset, Bitcoin, to the S&P 500 and MSCI emerging markets indices have increased by about 12-16 percentage points since the onset of the COVID-19 pandemic, while those from its returns have increased by about 8-10 percentage points. Spillovers from the most traded stablecoin, Tether, to these indices have also increased by about 4-6 percentage points. In absolute terms, spillovers from Bitcoin to global equity markets are significant, explaining about 14-18 percent of the variation in equity price volatility and 8-10 percent of the variation in equity returns. These findings suggest that close monitoring of crypto asset markets and the adoption of appropriate regulatory policies are warranted to mitigate potential financial stability risks.
Keywords:
Crypto assets, international financial markets, volatility spillovers, return spillovers, dynamic connectedness, COVID-19, emerging markets, financial stability; crypto asset market; fringe asset class; price volatility; MSCI index; equity price misalignment; credit default swap Index; Virtual currencies; Spillovers; Stock markets; Emerging and frontier financial markets; Financial contagion; Global
Cover IMF Working Papers
The Asset Allocation of Emerging Market Mutual Funds
Mr. Piti Disyatat and Mr. R. G Gelos

coefficients. Table 1. Goodness-of-Fit Measures Levels Global East Asia Latin Model with Risk Aversion=15 RMSE 6.41 10.78 8.32 Theil Coefficient 0.42 0.27 0.17 Correlation 0.49 0.78 0.89 Model with Risk Aversion=5 RMSE 9.81 14.32 15.20 Theil Coefficient 0.56 0.33 0.29 Correlation 0.23 0.74 0.72 MSCI Index RMSE 3.37 7.85 5.44 Theil Coefficient 0.25 0.22 0.12 Correlation 0.79 0.81 0.96 Differences

Keywords:
WP; expected return; portfolio; asset; fund; return; portfolio choice; fund portfolio; managers arc; MSCI index; fund performance
Cover IMF Working Papers
Coincident Indicators of Capital Flows
Ms. Malika Pant and Yanliang Miao
Capital flows data from Balance of Payments statistics often lag 3-6 months, which renders timely surveillance and policy deliberation difficult. To address the tension, we propose two coincident composite indicators for capital flows that improve upon existing proxies. We find that the most widely used proxy, the capital tracker, often overpredicts net flows by 30 percent. We augment the tracker into a composite indicator by assigning to it a lesser but optimally estimated weight while incorporating other regional and global coincident correlates of capital flows. The proposed composite indicator of net flows outperforms the capital tracker in its original format. To complement the indicator with an even timelier variant, we also utilize the EPFR high frequency coverage of gross bond and equity flows as an indicator on foreign investors' sentiment.
Keywords:
WP; border; net capital; Other EMs; capital; Capital Flows; Coincident Indicators; Capital Tracker; bond flow; EPFR flow; MSCI index; merchandise trade balance; EPFR data; Latin America EMs; Stocks; Bonds; Trade balance; Cyclical indicators; Global; Europe; Asia and Pacific
Cover Global Financial Stability Notes