Global financial interconnectedness: A Non-Linear Assessment of the Uncertainty Channel

Candelon, Bertrand; Ferrara, Laurent; Ts, M. Jo

Global financial interconnectedness: A Non-Linear Assessment of the Uncertainty Channel

Bertrand Candelon, Laurent Ferrara and M. Jo Ts
Authors registered in the RePEc Author Service: Marc Joëts

Abstract: The role of uncertainty in the global economy is now widely recognized by policy-makers but its effects on the international financial system are less understood. In this paper we assess the impact of uncertainty fluctuations on the interconnectedness within the international system of equity prices. In this respect, we extend the measure of connectedness put forward by Diebold and Yilmaz (2009) by allowing for non-linear effects through the estimation of a non-linear Threshold VAR model whose regimes depend on the level on uncertainty. Results clearly show that high uncertainty tends to generate more connectedness among equity indexes of a set of advanced and emerging countries. From an economic policy point of view, this result suggests that in the presence of high uncertainty, an adverse financial shock in a specific country is likely to propagate more widely and more strongly to the whole financial system. This result advocates for a close real-time monitoring of uncertainty measures.

Keywords: financial markets; network interconnectedness; uncertainty; non-linear model. (search for similar items in EconPapers)
JEL-codes: C31 D84 G15 (search for similar items in EconPapers)
Pages: 47 pages
Date: 2018
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (9)

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Persistent link: https://EconPapers.repec.org/RePEc:bfr:banfra:661

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