Calm before the storm: an early warning approach before and during the COVID-19 crisis

Raisul Islam () and Vladimir Volkov ()
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Raisul Islam: Tasmanian School of Business & Economics, University of Tasmania, http://www.utas.edu.au/business-and-economics
Vladimir Volkov: Tasmanian School of Business & Economics, University of Tasmania, https://www.utas.edu.au/profiles/staff/economics/vladimir-volkov

No 2020-09, Working Papers from University of Tasmania, Tasmanian School of Business and Economics

Abstract: This paper develops a means of visualising the vulnerability of complex systems of financial interactions resulting from the changing risk tolerance of investors. The investors’ risk behavior contributes to the buildup of vulnerability in crisis and in calm periods. We show how both time-varying risk tolerance and spillover indices can be translated into two-dimensional information transmission and crisis transmission maps, respectively. Taken together, the information transmission maps have the advantage of highlighting potential crisis transmission pathways in the crisis transmission maps. These maps provide clear visualization showing information transmission predates crisis transmission drawing from conditional signed spillover and risk tolerance indices computed from equity market data for 31 global markets between 1998 and 2020. We examine if investors’ risk preference induces a crisis and to what extent such a predictor may be related to a pandemic. Furthermore, we take a special look at the Covid-19 pandemic and its impact on the dynamics of systemic crisis transmission.

Keywords: Systemic risk; networks; COVID-19 (search for similar items in EconPapers)
JEL-codes: C3 C32 C45 C53 D85 G10 (search for similar items in EconPapers)
Pages: 56 pages
Date: 2020
New Economics Papers: this item is included in nep-rmg
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Published by the University of Tasmania. Discussion paper 2020-09

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