Global financial cycle dynamics under VIX shocks: A FAVAR approach

Date

2026-3-16

Author

Demirbaş, Nesrin

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This dissertation investigates whether Global Financial Cycle dynamics similar to those attributed to U.S. monetary policy emerge following shocks to global uncertainty. The analysis employs a data-rich Factor-Augmented Vector Autoregression (FAVAR) combining a factor-extraction step with a Bayesian VAR. Using global and disaggregated macro-financial variables, the model extracts latent factors summarizing the common dynamics of the Global Financial Cycle and traces impulse responses to orthogonalized VIX innovations. The results indicate that unexpected increases in global uncertainty are followed by broad-based financial tightening across countries. This tightening includes retrenchment in cross-border credit, contractions in domestic credit, declines in intermediaries’ leverage, lower risky asset prices, and reduced real activity and trade. Transmission patterns vary over time, being stronger in the pre-crisis period and more heterogeneous thereafter. An extension to Türkiye reveals evolving channels of transmission. While pre-crisis effects operated mainly through cross-border lending patterns, bank lending, and equity markets, post-crisis dynamics are more closely linked to broader credit aggregates and a notable contraction in bank leverage. Overall, the study demonstrates that market-based uncertainty shocks can act as a complementary source of Global Financial Cycle dynamics alongside monetary policy. Consistent with Rey’s “dilemma,” the findings suggest that in a world of free capital mobility, domestic financial conditions can be influenced by global risk sentiment even under flexible exchange rates. From a policy perspective, the findings highlight the need to monitor global risk indicators such as the VIX and to strengthen macroprudential frameworks.

Subject Keywords

Global Financial Cycle, Uncertainty and Risk Aversion, VIX, FAVAR, Dilemma

URI

https://hdl.handle.net/11511/118784

Collections

Graduate School of Social Sciences, Thesis