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Recent empirical studies show that unprecedented upsurge in synchronization of financial cycles across countries is primarily driven by fluctuations in the global attitude towards risk. This paper estimates a three-region dynamic stochastic general equilibrium (DSGE) model of the Euro Area (EA), the United States (US) and the rest of the world (RoW) to analyze financial spillovers and the impact of a global financial (risk) shock. We introduce financial linkages via internationally traded firms' shares and estimate a region-specific effect of a global financial shock. The global shock identified by the model is consistent with observed common factor of the traded market indexes. The posterior estimates of financial spillovers from global risk shock are well identified and high for EA and RoW, while close to zero for US, suggesting that the US market can play a significant role in affecting the global sentiments. Our results suggest that financial linkages via cross-country equity holdings increase substantially the financial spillovers and produce model-implied co-movements of real variables closer to the one observed in the data. The 2008-09 crisis has been mostly driven by the global financial shock, while the double dip recession in EA has been associated with domestic factors. Finally, accounting for Zero Lower Bound (ZLB) environment in EA, we find that financial spillovers on real GDP and employment almost double and global financial shocks behave like uncertainty shocks dampening consumption and investment simultaneously.
