North American Journal of Economics and Finance 62 (2022) 101719

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North American Journal of Economics and Finance

journal homepage: www.elsevier.com/locate/najef

Winds of tapering, financial gravity and COVID-19

Alper Kirik a ,∗, Veysel Ulusoy b
a
Bischof-Kaller-Straße 4, 61462, Königstein im Taunus, Germany
b
Financial Economics Programme, Istanbul, 34755, Turkey

ARTICLE INFO ABSTRACT

Keywords: Real interest rates have fallen dramatically since the early 1980s. Economic theory states that
Financial gravity lower real rates discourage savings while promoting spending. However, today, in the world
Tapering economy, we face a global saving glut problem in which, even in negative real rates, economic
COVID-19
agents keep saving. This situation leads to excess demand for safe assets (US Treasuries),
Monetary policy
lower bond yields, and higher equity valuations. Thus, the world economy has become more
Global saving glut
dependent on major economies, especially the United States. In this research, we aim to measure
the dependency of the world economy on United States monetary policy. We called this new
methodology ‘‘financial gravity’’ and tried to quantify the nature by using panel data analysis.
We define monetary dependency (financial gravity) by US Investment flows and their reaction
against International Reserves, Credit Default Spreads (CDS), and Foreign Exchange Rates. Our
empirical findings support that financial gravity is positively related to international reserves
and negatively related to Credit Default Swap Spreads (CDS) and Foreign Exchange rates.
We also analyzed the COVID-19 period and found that pandemics positively contributed to
world reserve accumulation due to economic lock-down measures, fiscal stimulus packages
(unemployment benefits), and decreased global spending.

1. Introduction

In April 2020, Jerome Powel, Chair of the Federal Reserve Board of Governors, stated that they would use all the available tools
aggressively and proactively until the world economy goes back on its track. This statement is one of the practical proof of world
economies’ dependency on US monetary policy.
During stressed periods, central bankers of developed economies have the primary responsibility to take necessary actions to
stabilize world economy. The collapse of the pandemic in March 2020 led all market players to convert all their positions into cash
or only most liquid assets. As a result, there was a massive demand for US dollars. Thus EURUSD cross currency basis has collapsed;
even XAUUSD does not trade for a while. The sharp spikes in basis swaps are shown in Fig. 1 as an example.
As seen from the graph, right after the announcement of the pandemic, most of the assets, including cash denominated in EUR,
tended to be converted into USD, which led squeeze in liquidity in the money markets denominated in USD. Thus, USD plays the
role of the primary currency in global financial economy. Therefore, our model focuses on the US and its bilateral relations with
other countries.
The last decade was an exciting period for financial markets since the sub-prime mortgage crises in the United States, 2011–
2012, the European Crises, 2020 announcement of a pandemic due to coronavirus widespread worldwide led to financial turmoil
and unorthodox policy actions taken by Central Bankers. In statistical terms, turmoil means an unexpected shock to the financial

∗ Correspondence to: Bischof-Kaller-Straße 4, 61462, Königstein im Taunus, Germany.

E-mail address: [email protected] (A. Kirik).

https://doi.org/10.1016/j.najef.2022.101719
Received 29 August 2021; Received in revised form 27 April 2022; Accepted 31 May 2022
Available online 14 June 2022
1062-9408/© 2022 Elsevier Inc. All rights reserved.
A. Kirik and V. Ulusoy North American Journal of Economics and Finance 62 (2022) 101719

Fig. 1. EURUSD cross currency basis swaps.

Source: European Central Bank.

system, leading to structural breaks and distortions to the economic system. There is a wide range of literature on what triggers
financial crises, and results include but are not limited to credit growth, asset bubbles, inappropriate macro-prudential policies, and
current account deficits (Kiley, 2021).
The estimated sensitivity of the global liquidity components, i.e., international capital flows, peaked in 2013 when former Fed
Chairman Bernanke announced that Fed would slow down the asset purchases that triggered foreign exchange rate volatility in
emerging countries, especially in the Asia region (Avdjiev et al., 2020). This period called the ‘‘Taper Tantrum’’, led to sharp
spikes in foreign exchange rates, brought panic and volatility to the markets, and forced central bankers to be cautious about
future monetary policy messages of the United States (Jiao, 2021). Similar reactions have been observed in Europe in 2015, ‘‘Bund
Tantrum’’ concentration of bond ownership and market illiquidity undermines market microstructure and damage transmission
channels for market shocks and indirectly real economy (Boermans et al., 2016)
The ‘‘Taper Tantrum’’ brought a new concept called ‘‘Fragile Five’’, which is referring the countries hit by the event whose
currencies are deteriorated and sovereign yields and credit default spreads are widened most. If we would add Russia to the ‘‘Fragile
Five’’, the new group would be known as the ‘‘Sorry Six’’ (Amstad et al., 2016)
Since international financial markets are linked and influenced by significant policymakers, i.e., Fed or European Central Bank,
we thought we could understand the nature of linkage by the financial gravity model. Our research aims to contribute to the existing
literature by providing theoretical and empirical evidence for the gravity of financial markets. There is limited coverage of financial
gravity, mainly driven by physical distance, trade, and minor financial variables (Zhu & Yang, 2008). Sophistication in econometric
measurement advanced daily; however, full-scope financial gravity has not been reached yet.
Recent academic work on the economics of gravity is widely applied to analyze and understand bilateral trade flows between
countries. However, the usage of the gravity model should not be limited to geographical economics. We thought the model was
also a good instrument for analyzing international investment flows.
Then the question becomes why financial gravity should be different from existing gravity literature? Why should we not use
macroeconomic fundamentals for modeling financial assets? Previous studies investigated the linkage between tangible assets and
financial assets due to the economic crisis of 2008 since the housing bubble triggered it. Regime switching models, volatility spill-
over analysis, and inter-market dependence have been measured by various researchers (Chan et al., 2011). However, linkage or
inter-dependence does not mean we can use these variables interchangeably.
First, as a macroeconomic phenomenon, trade is a physical transaction where an asset needs to be transported cross-border.
However, financial assets are different from physical assets by nature. If we take an example of financial security, i.e., a sovereign
bond, an investor in any region can buy or sell a sovereign bond in seconds without any transaction cost. Since transactions
are executed electronically, and delivery is made electronically, the physical distance is irrelevant. Moreover, settlement of the
transaction being made by a clearinghouse, there is no insurance required for delivery of the security; the only risk is the price
risk until settlement which is called delivery-versus-payment (DVP). Thus, physical distance as an input for the gravity model is not
applicable for financial assets.

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A. Kirik and V. Ulusoy North American Journal of Economics and Finance 62 (2022) 101719

Secondly, macroeconomic variables are lagged, and their drivers are different from the financial assets. Macroeconomic data is
less frequent, quarterly or monthly; on the other hand, financial data can be measured by seconds, minutes, or hours. Moreover,
financial data is subject to speculation if the market is not liquid or efficient, so extended time intervals can lead to information
loss for modeling.
Third, except for gold, physical assets are not high-quality liquid assets (HQLA), which is a fundamental input for the Liquidity
Coverage Ratio of the Basel III accord. Gold is an exceptional case where it is a part of international reserves and a buffer for external
shocks to an economy. Thus, the demand function cannot be the same for financial and physical assets which is the main argument
for Secular Stagnation Hypothesis. Furthermore, Secular Stagnation Hypothesis leads an excess demand for Safe Assets, US Treasury
Bills, and the birth of the concept of Global Saving Glut (GSG) Countries.
Lastly, US Investment Flows is an interesting subject and have been studied extensively. One of the main findings is that lower
interest rates in a country may lead to shifts in foreign investment decisions (Ammer et al., 2019). Our model tries to estimate the
dependency of US Monetary policy where we include only financial variables. We agree that financial variables and macroeconomic
variables are interconnected, such as inflation and interest rates. However, macroeconomic variables could be lagged, or policy
actions against those variables can be lagged. For example, discussions on inflation surged in the world economy right after the
COVID-19 pandemic and heated in the second quarter of 2021. Since then, the ECB has been discussing the status of inflation,
whether it is transitory or not. Accordingly, Eurozone inflation in December 2019 was 1.3%, whereas EONIA (Euro Overnight Index
Average), the main interbank funding rate, was only −0.44%. As of Q1-2022 inflation rate was 7.5%, and the interest rate was
−0.59%. Although COVID-19 adversely impacted the situation, we may say that due to systemic shocks, the reaction of monetary
authorities needed to be delayed. Such mismatches led us to exclude macro variables in our analysis. Another example could be
the well-known phenomenon where the opportunity cost of savings is the interest rate. From 2019 to 2021, interest rates in the
EURO area decreased by 15 bps; on the other hand, the household saving rate increased from 12.38% to 13.34%, which could
be an example of a global saving glut phenomenon. One can argue that this situation is specific to Eurozone and ECB’s monetary
policy actions. However, such a phenomenon was not limited to developed markets. As an emerging market, the Central Bank
of Turkey (CBTR) took heterodox monetary policy measures. The CBTR enforced the policy rates and lowered them at the price
of hyperinflation. Consequently, the interest rate market is divided into onshore and offshore, where the basis between the two
markets reached 1500 bps. Moreover, regulatory authority restricted the right and wrong way offshore swaps, which led to the
offshore market overnight swap rate reaching 3000%. Hence, macroeconomic variables and policy actions can be lagged for a long
period, which may mislead our interpretation of the nature of the relationship.
Existing gravity models cannot be applied to financial markets for the reasons listed above. Thus, based on the existing theoretical
framework, we convert macroeconomic variables into financial variables to obtain a suitable gravity model.

2. Theoretical framework & data

2.0.0.1. Theoretical framework. We used a modified version of Coeurdacier and Martin to derive a gravity equation for financial
markets. Their gravity model is a simplified version of Martin and Rey, used to model international trade in assets with transaction
costs (Coeurdacier & Martin, 2009).

𝑙𝑜𝑔(𝐴𝑠𝑠𝑒𝑡𝑖𝑗 ) = 𝑙𝑜𝑔𝐿𝑖 𝑦𝑖 + 𝑙𝑜𝑔𝑛𝑗 − (𝜖 − 1)𝑙𝑜𝑔𝜏𝑖𝑗 + (𝜖 − 1)𝑙𝑜𝑔𝑟𝑗 + (𝜖 − 1)𝑙𝑜𝑔𝑄𝑖 (1)

In their model, dependent variable, 𝐴𝑠𝑠𝑒𝑡𝑖𝑗 is the holdings of cross-border assets of 𝑐𝑜𝑢𝑛𝑡𝑟𝑦𝑗 by 𝑐𝑜𝑢𝑛𝑡𝑟𝑦𝑖 . On the right-hand side
of the equation, 𝐿𝑖 𝑦𝑖 is the gross domestic product of the 𝑐𝑜𝑢𝑛𝑡𝑟𝑦𝑖 representing the size of the country. 𝑛𝑗 is the number of assets
in 𝑐𝑜𝑢𝑛𝑡𝑟𝑦𝑗 , a proxy for financial sophistication. As stated in Martin and Rey, the volume and variety of assets issued by a country
is a vital sign of financial openness, positively related to income, represents the country’s richness, and sign of being a financial
center (Martin & Rey, 2006). 𝜏𝑖𝑗 is the transaction cost of bilateral trade between two countries, inversely related asset holdings
of the country in question. 𝑟𝑗 implies that countries with high expected returns are expected to bear more demand compared to
low-yielding ones. Lastly, 𝑄𝑖 is the price index of the country.
As it is seen from the variables above, the model produced by Coeurdacier and Martin includes macroeconomic and financial
market variables; however, their specification is not sufficient to prescribe full financial markets gravity since macroeconomic
variables are lagged variables. Based on the fact that financial variables are traded in a more dynamic environment, we are now
ready to produce our financial markets gravity model states as below:
The first step in our analysis is to estimate a standard gravity model with financial variables:
𝐹 𝑋𝑅𝑒𝑠𝑒𝑟𝑣𝑒𝑠𝑗𝑡
𝑙𝑜𝑔(𝑥𝑗𝑡 ) = 𝛼 + 𝛽𝑗 + 𝛾𝑗 ( ) − 𝛷𝑙𝑜𝑔(𝑍𝑗𝑡 ) + 𝜖𝑗𝑡 (2)
𝐹 𝑋𝑅𝑒𝑠𝑒𝑟𝑣𝑒𝑠𝑊 𝑜𝑟𝑙𝑑𝑗𝑡
𝑋𝑗𝑡 is the dependent variable, the logarithm of US investors’ holdings of foreign bonds in 2011 to 2020 for country j.
The term, FX Reserves, is a hybrid variety that connects financial markets to economic fundamentals. Reserves are essential
for a country to sustain economic and financial stability. From Bretton Woods till today, pioneered by emerging economies, oil
exporters, global saving glut (GSG) countries, international reserves as the portion of a gross domestic product exponentially grew
due to financial globalization and financial openness. From 1970 to 2010, international reserves have a 15% annual growth rate,
mainly driven by emerging economies (Steiner, 2013). Widening float exchange rate regimes and increased capital flow led central
bankers to build international reserves to defend the domestic currency (Obstfeld et al., 2010). Moreover, monetary spillovers have

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A. Kirik and V. Ulusoy North American Journal of Economics and Finance 62 (2022) 101719

a non-linear and direct relationship with exchange rate stability, where active reserve management is an essential element in this
case (Ahmed, 2021).
International reserves (FX Reserves) are considered an emergency exit from economic turbulence and essential for keeping
financial markets stable. It is used to cool down the currency and adequately intervene in the market by central banks. In addition,
substantial FX Reserves provide shelter for structural economic problems. For example, in most Emerging Economies, there is a
currency mismatch between savings and investments, in which investments take place in local currency, and savings are in foreign
currency. As a result, the bank’s balance sheet consists of FX Deposits against domestic currency loans, making banks’ balance-sheet
fragile and leading central banks to keep more reserves. Since Central Banks, as a lender of last resort, needs to fund the short
position of bank’s local currency liquidity, the FX Swap facilities will be placed to retrieve FX deposits from banks and provide
𝐹 𝑋𝑅𝑒𝑠𝑒𝑟𝑣𝑒𝑠𝑗𝑡
local currency funding to the market. Thus, the variable 𝐹 𝑋𝑅𝑒𝑠𝑒𝑟𝑣𝑒𝑠𝑊 𝑜𝑟𝑙𝑑 is a market share proxy that belongs to the country j to
𝑗𝑡
represent a bridge to economic variables to financial markets.
As stated before, the Central Banks of developed countries have the responsibility to stabilize the overall world economy. During
the COVID-19 crisis, Fed took massive monetary actions to battle turbulence in the world economy. Actions include but are not
limited to lowering the fed funds rate and increasing QE. Moreover, to support the global monetary system by providing excessive
dollar funding to the world economy, the Fed established international swap lines and launched a new cash facility called the Foreign
and International Monetary Authorities (FIMA) Repo Facility. Those international funding lines, especially the FIMA Repo facility,
can be accessible if a country has US Treasuries, gold, or other hard currencies as a part of its foreign reserves. To explain with an
example, South Africa’s International Reserves to GDP ratio is 10.3%, and the holding of US Treasuries is 16.3 billion USD, Turkey’s
International Reserves to GDP ratio is 7.9%, and the holding of US Treasuries is only 1.6 billion USD. If we compare Reserves to GDP
ratio, we may say the strength of the central bank reserves is similar; on the other hand, holding US Treasuries are far from close.
Thus, Turkey could not get a penny while Fed was drowning the world in US Dollar funding. Using the variable ratio of foreign
reserves to world foreign reserves, we aim to measure the ability to access emergency funding against systemic shock, i.e., COVID,
in the world economy.
𝑍𝑗𝑡 is the financial Market determinant where

𝑍𝑗𝑡 = 𝐹 𝑋𝑅𝑎𝑡𝑒𝑗𝑡 𝛷1 + 𝐶𝐷𝑆𝑗𝑡 𝛷2 (3)

𝐹 𝑋𝑅𝑎𝑡𝑒𝑗 is the country’s foreign exchange rate per USD, and 𝐶𝐷𝑆𝑗 is the credit default swap spread of the country 𝑗. An increase
in FX rate means the devaluation of the currency, increase in credit default swap spreads an increase in credit risk in USD; both
variables represent the distance from the domain country, i.e., the United States. Therefore, both variables are expected to have a
negative sign.
Exchange Rate Targeting is one of the central bank regimes in monetary economics. The main aim of the board of governors is
to stabilize the nominal exchange rate. Therefore, we believe nominal interest rates capture the degree of dependency on United
States monetary policy rather than comparing economic fundamentals. Furthermore, a country’s credit risk is zero in local currency
because the country in question can print money and pay back its debt. Therefore, no CDS can be traded denominated in local
currency. In other words, the default risk of a country exists for foreign currency debt. Thus, CDS is traded actively in the reserve
currency, i.e., USD. The CDS provides protection against default of debt in nominal face value. Therefore, to sustain coherence
between variables, we need to use a nominal exchange rate instead of a real exchange rate, where insured capital is denominated
in nominal terms.
We select these variables based on real life cycle of a shock and its impacts on the financial markets. In adverse economic
conditions; the initial hit will get into the local currency bond market. Then, sell-off government bonds followed by sell-off local
currency against reserve currency. These actions allow traders to liquidate their risky position into a risk-free position, i.e., cash
that bears overnight interest in the reserve currency, EURO, or US Dollar. On the other hand, shorting local currency leads to
deterioration in local currency and increases uncertainty in repaying FX debt of the institutions, bringing a sell-off in the sovereign
bond market and credit default swap (CDS) market, respectively. CDS is the insurance of bond issuer, and interest rate swap spread
and credit default spread has long-term equilibrium.
𝛽𝑗 is the corona dummy to control how gravity changes after the official announcement of pandemics all around the world in
march 2020. Therefore, we expect the sign of the corona dummy will be positive.
We use non-US factors in our model for two main reasons. First, the latest trend that we have observed during the pandemic
regarding asset conversion in terms of foreign currency could be relevant evidence. Second, the ‘‘Global Saving Glut (GSG)’’
hypothesis argues that capital flows from emerging countries to the United States created a demand for US safe assets, i.e., US
Treasury Debt and Agency Debt, and lowered interest rates. The GSG story originally referred to foreign exchange policies and an
export-oriented development strategy in much of Asia and parts of Latin America that caused the accumulation of massive stockpiles
of official reserves. These reserves were recycled into global bond markets, depressing yields in the major developed countries below
levels justified by their macro fundamentals. The bottom line is that reflecting demographic trends, ex-ante investment spending
requirements in the major advanced economies will fall relative to GDP by more than the decline in the household saving rate,
compressing the low level of equilibrium interest rates even further. Furthermore, the stock of publicly-available government bonds
is poised to shrink dramatically; the ECB and the Bank of Japan will more than make up for the cessation of asset purchases by the
Bank of England and the Fed once we consider that net government bond issuance is much smaller today than was the case when
those two central banks were expanding their balance sheets.
We apply panel data regression to estimate the equations stated above. Prior to the estimation, we check the stationarity of panel
data. We use the panel unit root test of Levin–Lin–Chu, in which the test assumes that the series under scrutiny are cross-sectionally
independent (Kleiber & Lupi, 2011). Furthermore, we applied the Hausman test for model misspecification (Hsiao, 2003). The nature
of the variables is the primary driver of the model selection.

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A. Kirik and V. Ulusoy North American Journal of Economics and Finance 62 (2022) 101719

Table 1
Levin–Lin–Chu Unit-Root test for panel data.
Test statistic P value Alternative hypothesis
−13.04 3.473e−39*** Stationarity

Table 2
Hausman test for model specification.
Test statistic df P value Alternative hypothesis
33.64 4 8.852e−07*** One model is inconsistent

Table 3
Random effect model.
Securities holdings
Random effects model
FX Reserves 11.057∗∗∗ (1.519)
log (FX Rate) −0.066∗∗ (0.028)
log (CDS) −0.203∗∗∗ (0.011)
Corona Dummy 0.282∗∗∗ (0.019)
Constant 10.776∗∗∗ (0.267)
Observations 7,452
R2 0.086
Adjusted R2 0.085
F Statistic 699.673∗∗∗

Note: ∗ p<0.1; ∗∗
p<0.05; ∗∗∗
p<0.01.

2.0.0.2. Data. We use US Investors’ securities holdings from The Treasury International Capital (TIC) System, which provides
country and instrument breakdown of the data, credit default swap rates from Bloomberg Fixed Income Database, International
Reserves, and Foreign Exchange rates from IMF International Financial Statistics Database. Our analysis has been performed on
monthly data from January 2012 to December 2020. We collect data for 74 countries where we can quantify credit default spread.
Later on, we removed Iraq, Kuwait, and Peru due to unreliable data on financial variables. Moreover, we also removed Argentina
and Greece for distortion in CDS data. Finally, our dataset consists of 71 countries with five variables.

3. Results and discussion

3.0.0.1. Empirical results. Before estimating equations, we check the stationarity of the panel dataset. In the case of panel data, panel
unit root is more critical than individual time-series unit root. Thus, we run the Levin–Lin–Chu Panel Unit-root test to comment on
the stationarity of the dataset. As shown in Table 1, test results suggest that our data is panel stationary, i.e., no further action is
required before continuing the estimation.
Hausman Test results suggest a random-effect model rather than a fixed-effect model, as shown in Table 2
We have run panel data regressions to estimate gravity equations with our new variables. We specified Random-Effect model,
results are summarized in Table 3. Our results suggest a statistically significant relationship for FX Reserve Market Share, CDS Level,
FX Rate, and Corona Dummy.
According to our empirical results, financial gravity is positively related to FX Reserves and negatively related to CDS and FX
Rates, as we expect in our theoretical framework. The pandemic period also has a statistically significant impact on gravity could
have various reasons, which will be discussed in the next section.

3.0.0.2. Discussion. The recovery from the 2020 COVID recession is now well underway, and many investors are curious about
when central bankers might respond by removing monetary policy accommodation and starting to lift their policy rates. Some
central banks appear to move the policy rates, and the others will reduce or stop asset purchase programs. For example, the Bank
of Canada and Bank of England have already started to reduce their rates of bond-buying, and the Fed started to provide forward
guidance about its tapering.
So, why is it crucial in our context? First, if we rule out country-specific unsystematic risks, financial gravity provides insights into
fragility. In financial terms, fragility means foreign exchange rate deterioration, credit default swap spread widening, and adequate
positioning in international reserves. If we know all three with their elasticities, we can infer whether a central bank can defend its
currency promptly against sudden sell-off in currency or sovereign debt markets.
We have mentioned in previous sections that Central Banks of Emerging Economies have already accumulated international
reserves as a defense strategy from the beginning of 2000. International Reserves are diversified portfolios mainly held in securities,
especially US Treasuries, covered bonds, or gold. Thus increasing reserves means increasing demand for US Treasuries and more
dependence on US monetary policy. The other way around, more strength against currency attacks. As of May 2021, central
bank holdings of foreign currencies in Asian Emerging economies reached approximately six trillion USD; if we exclude China,
international reserves of the region’s central banks stood at an all-time high of roughly three trillion USD (Jiao, 2021).

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A. Kirik and V. Ulusoy North American Journal of Economics and Finance 62 (2022) 101719

Another aspect we analyzed in this paper is the pandemic of 2020. COVID-19 has turned the world upside down this year and
severely impaired global trade. Most countries had also seen negative foreign direct investment (FDI) growth in 2020. The restrictions
and semi or full lock-down measures increased household savings further and accumulated more cash in the private sector and
households. This led to the expansion of the already large global savings glut. U.S. households were sitting on approximately two
trillion USD in excess savings as of the end of April 2021. This is money they would not have had in the absence of the pandemic.
The composition of these savings can be defined as slightly less than half of them are stimulus checks and unemployment benefits;
the rest is decreased spending during the pandemic. Enhanced unemployment benefits will expire in September 2021; schools will
resume normal operations, and more workers will flow back into the labor market. At the same time, some of the bottlenecks
currently gripping the global supply chain should abate, allowing for increased output. To synthesize all the information above,
in line with our expectations, empirical results supported that period of COVID-19 positively impacted financial gravity, although
some of the Global Saving Glut Countries’ investments went through sovereign securities to stocks. The concept of a savings glut is
also related to another, less well-known concept: a safe asset shortage. If the private sector earns more than it spends, it must, by
definition, accumulate assets. In principle, governments can satiate the demand for safe assets by issuing more bonds. In practice,
governments have often been reluctant to run persistently large budget deficits for fear that this could undermine their credibility.
There are several studies performed recently on the impact of COVID-19 on financial markets, especially reaction on fixed income
securities. Some of the results showed that the movement of corporate bond spreads does not show any triggering reaction on CDS
Spreads (Haddad et al., 2021). There could be a couple of reasons behind that. Initially, corporate bond spreads are cash-based
assets; on the other hand, CDS is insurance. For a fixed-income trader, purchasing a bond vs. CDS has the same implications on
position. However, their cash impact is not the same. In a time of turmoil, the general tendency is to convert positions into cash
from a trading perspective. Moreover, cash is generally required to be in hard currency. Thus, during a crisis, bond spreads may
not be a good representative of credit risk since the liquidity profile of the asset is more important for pricing at that time.
As it is stated in the data section, our analysis covers the time period from 2012 to 2020 in which major economies made massive
liquidity injections due to systemic shocks in the world economy. The financial crisis and the ensuing Great Recession reinforced the
rise in global savings, though incremental accumulation has been concentrated in Europe, the U.S., and other advanced economies.
Governments have tightened their belts even as the private sector deleveraged. Thus, all three sectors have been trying to save more
at the same time: government, households, and businesses. A rising propensity to save and a waning appetite for capital investment
drove equilibrium interest rates sharply lower and increased demand for alternative assets.
We must note that we cannot rule out the endogeneity issue. Therefore, results should be interpreted cautiously.

4. Conclusion

In our study, we have introduced a full-scale financial gravity model to explain inter-linkages among financial markets. Our
findings with strong empirical evidence that gravity is a direct function of international reserves, the inverse function of credit
default swap spreads, and foreign exchange rates. Thanks to safe asset shortages and the global saving glut, countries are reluctant
to sit on excess cash, and households shifted some of their funds into the stock market. With corporate buybacks outpacing new
share issuance, stock prices had nowhere to go but up. Moreover, a falling bond yields further supercharged equity valuations. We
can infer from our findings that competition for accumulating international reserves among Emerging economies will increase, and
the problem of safe asset shortages will widen.

CRediT authorship contribution statement

Alper Kirik: Conceptualization, Methodology, Software, Data. Veysel Ulusoy: Supervision, Conceptualization, Methodology.

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