Global financial risk and market connectedness: An empirical analysis of COVOL and major financial markets

Chunlin Lang, Danyang Xu, Shaen Corbet, Yang Hu and John W. Goodell

International Review of Financial Analysis, 2024, vol. 93, issue C

Abstract: This study presents a novel investigation into the dynamic connectedness between the recently developed global risk measure, COVOL, created by Engle and Campos-Martins (2023), and the major international stock, gold, and crude oil markets in China, the US and Europe. Applying conditional and aggregated connectedness approaches, we systematically uncover the multi-dimensional interlinkages to understand volatility transmissions within these markets. Results reveal that COVOL predominantly receives volatility transmissions, with the US and European stock markets acting as principal transmitters of shocks across all three regional systems. The research also highlights the crucial role of significant events, such as the Global Financial Crisis, the Chinese stock market crash, and the COVID-19 pandemic, when increasing the intensity of connectedness. The volatility transmission of the COVOL-gold pairing is comparatively weaker than the COVOL-stock and COVOL-oil pairs. At the same time, the US and Europe consistently transmit stronger shocks to global financial risk, contributing significantly to the global risk transmission channel, whereas, in contrast, China’s financial markets transmit less international uncertainty. Robustness testing verifies these findings.

Keywords: Global financial risk; Dynamic connectedness; COVOL; Stock markets; Commodity markets; Volatility transmission; Financial crisis (search for similar items in EconPapers)
JEL-codes: C32 C58 F3 G01 G15 G17 (search for similar items in EconPapers)
Date: 2024
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Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:finana:v:93:y:2024:i:c:s105752192400084x

DOI: 10.1016/j.irfa.2024.103152

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