# 4.3 Common factors and the global ...nancial cycle

The variance share of common factors shown in Table 5 can be interpreted as the contribution of the international cycle to the variation of capital in‡ows and out‡ows. A separate question is what drives that cycle, and how it is re‡ected in observable variables. The ’push vs pull’ literature, going back to Calvo, Leiderman and Reinhart (1996), as well as the more recent literature on the global ...nancial cycle (starting with Rey 2013), have stressed the role of a few global (or ...nancial-center) variables capturing ...nancial conditions worldwide as key drivers of the commonality of capital ‡ows. Global risk, as summarized by the VIX and similar measures, is often taken as a sort of summary statistic of the ’global ...nancial cycle’ (Rey 2013, Miranda-Agrippino and Rey 2015), and typically found to be negatively related to capital ‡ows, especially in‡ows to emerging markets.<sup>21</sup> However, other global ...nancial variables capturing advanced-country monetary policy (such as the U.S. short-term interest rate and/or the term premium), as well as global growth, are often found to a¤ect capital ‡ows to multiple countries, even after controlling for the VIX or other risk proxies (e.g., Avdjiev et al 2017a; Cerutti, Claesens and Ratnovsky 2017). Bruno and Shin (2015b) argue that the same should apply to the U.S. real exchange rate: because of the dominant role of the dollar as currency of denomination of ...nancial contracts worldwide, dollar appreciation constitutes a tightening of global ...nancial conditions.

To explore the fundamental covariates of the global ...nancial cycle, Table 6 reports regressions of the estimated common factors on selected global variables (or U.S. variables, as they pertain to the world’s leading ...nancial center).<sup>22</sup> The top block of the table reports univariate regressions of the factors on the VIX and other risk proxies. Because the VIX is not available prior to 1990, we also use its predecessor the VXO, which is available since 1986, as well as the BAA 10-year corporate spread, which represents a commonly-used measure of market risk premia. Consistent with earlier literature, all the factors exhibit a signi...cant negative correlation with the three measures of risk. This applies to the global factors as well as the advanced-country and emerging-country group factors, and to both in‡ows and out‡ows. The largest coe¢ cient estimates are found in the regression with the advancedcountry COD factor as dependent variable, suggesting that risk particularly discourages out‡ows from these countries, over and above its e¤ects on other ‡ows.

> 21See Forbes and Warnock (2012), Broner et al (2013), Bruno and Shin (2015a,b), Cerutti, Claessens and Ratnovsky (2017), Avdjiev et al (2017a,b), Eichengreen, Gupta and Masetti (2017), and Obstfeld, Ostry and Qureshi (2017).

> 22Because of the high persistence of the factors, to avoid spurious inferences the exercises are run with the variables expressed in ...rst di¤erences. This tends to weaken the explanatory power of the regressions, so they o¤er a conservative view on the strength of the relations under consideration. At the same time, the samples are short enough that the results should be taken with caution.

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