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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.
Tara Iyer

of US equity prices from their fundamental values (October 2021 Global Financial Stability Report , Chapter 1). HY = High-Yield, IG = Investment-Grade, CDX = Credit Default Swap Index. Overall, these results corroborate previous findings in the literature of a weak initial relationship between crypto price swings and equity price movements but indicate that the link has strengthened significantly over time. This could be attributed to several factors, including the increasing adoption of crypto assets alongside traditional assets such as stocks and bonds in

Mr. Jorge A Chan-Lau

derivatives prices. III. E xtracting S ystematic D efault R isk M easures F rom C redit D erivatives P rices The most simple proxy for systemic default risk is the spread of a credit derivaties index, as long as the index comprises a relatively large cross section of firms. The spread of a credit derivatives index is the simple average of the spread of a number of credit default swap contracts referencing individual issuers. For instance, in the case of the 5-year North America investment grade credit default swap index (CDX.IG.NA), the spread is the average

Mr. Jorge A Chan-Lau
This paper finds that systematic default risk, or the event of widespread defaults in the corporate sector, is an important determinant of equity returns. Moreover, the market price of systematic default risk is one order of magnitude higher than the market price of other risk factors. In contrast to studies by Fama and French (1993, 1996 ) and Vassalou and Xing (2004), this paper uses a market-based measure of systematic default risk. The measure is constructed using price information from credit derivatives prices, namely the spreads of standardized single-tranche collateralized debt obligations on credit derivatives indices.
International Monetary Fund. Monetary and Capital Markets Department

Private Debt Market $0.7 trillion Limited data on prices High return targets Capital call lines of credit Large locked-in capital and HTM positions Lenders in both LL and PD markets Low visibility of borrowers, investors, and transactions Sources: Bloomberg Finance L.P.; Dealogic; and IMF staff calculations. Note: “Complexity and Opacity” refers to a lack of data on prices, transactions, and investor positions in some areas of risky credit markets. CDS = credit default swap; CDX = credit default swap index; CLOs = collateralized loan

Ms. Brenda Gonzalez-Hermosillo

first sample covers the period between January 2, 1998 and August 9, 2007. 24 The bond spreads analyzed are sovereign spreads from Brazil, Bulgaria, Ecuador, Mexico, Panama, Peru, Russia, and Venezuela, and the corporate spreads are from the United States and Canada. The proxy used for default risk is the 10-year USD swap spread. The second sample starts in mid-September 2004. Here, we are able to use newer financial instruments that did not exist before (a credit default swap index) to gauge default risk directly. In addition, we are able to analyze a larger

Ms. Brenda Gonzalez-Hermosillo
A structural vector autoregression model is developed to analyze the dynamics of bond spreads among a sample of mature and developing countries during periods of financial stress in the last decade. The model identifies and quantifies the contribution on bond spreads from global market conditions (including funding liquidity, market liquidity, as well as credit and volatility risks), contagion effects, and idiosyncratic factors. While idiosyncratic factors explain a large amount of the changes in bond spreads over the sample, global market risk factors are fundamental driving forces during periods of stress. The relative importance of the different risk factors changes substantially depending on the crisis episode. Contagion from emerging markets becomes small or non-existent when global financial market risks explicitly are taken into account.
International Monetary Fund. Legal Dept.

://www.housingderivatives.typepad.com/housing_Derivatives/abx_index/ . The CBOE also began trading credit default options in 2007 that were automatically exercised upon the occurrence of specified credit events. Press Release, Chicago Board Options Exchange, CBEO to Launch Exchange-Traded Credit Default Options in Second Quarter (Mar. 14, 2007), http://www.cboe.com/AboutCBOE/Show-Document.aspx?DIR=ACNews&FILE=cboe_20070314a.doc . The Chicago Board of Trade (CBOT) also developed CDS Index Futures contracts., CBOT Credit Default Swap Index Futures Reference Guide (2008), available at http

International Monetary Fund. Monetary and Capital Markets Department

assumed a 30-day holding period while for swap-referenced positions, the holding period is assumed to be 10-days ( Figure 8 ). The 2018 Comprehensive Capital Analysis and Review (CCAR) severely adverse market scenario . For BBB corporate bonds, the relative shock to the bond position and the underlying derivative indexed by the Credit Default Swap Index-Investment Grade (on the run) was estimated at a scaling factor of 2. 108. The P&L fair valuation impact resulted from applying the corresponding shock to the cash and derivative position separately . BBA data

International Monetary Fund. Monetary and Capital Markets Department

’s April loss estimate of $945 billion related to U.S. residential and commercial mortgages, consumer credit, and corporate debt. In contrast, the BoE loss estimates of $317 billion to $380 billion applied to U.S. subprime residential mortgage securities only; while the OECD’s loss estimate of $422 billion was only for U.S. residential mortgage-related securities. 70 Like the CMBX, the LCDX (the leveraged loan credit default swap index) was reportedly shorted extensively by speculators seeking to profit from deterioration of the leveraged loan market, and index