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Interconnectedness in the global financial market

Matthias Raddant and Dror Y. Kenett

Journal of International Money and Finance, 2021, vol. 110, issue C

Abstract: The global financial system is highly complex, with cross-border interconnections and interdependencies. In this highly interconnected environment, local financial shocks and events can be easily amplified and turned into global events. This paper analyzes the dependencies among nearly 4,000 stocks from 15 countries. The stock returns are normalized by the estimated volatility using a GARCH framework, integrated with a robust regression process to estimate pairwise statistically significant relationships between stocks from different countries. The estimation results are used as a measure of statistical interconnectedness, and to derive network representations, both by country and by sector. We find that the Energy, Materials, and Financial sectors play a leading role in connecting markets, and that this role has increased over time for the Energy and Materials sectors. Our results thus confirm the role of global sectoral factors in stock market dependencies. Moreover, our results also show that the dependencies are rather volatile and that heterogeneity among stocks is a non-negligible aspect of this volatility. The transmission mechanism between financial markets is thus not stable, but rather governed by both changes in volatility and changes in the stocks’ contributions to the statistical interdependence across countries.

Keywords: Equity markets; Comovement; Financial networks; Interconnectedness (search for similar items in EconPapers)
JEL-codes: C58 F36 G11 G15 (search for similar items in EconPapers)
Date: 2021
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Working Paper: Interconnectedness in the Global Financial Market (2020) Downloads
Working Paper: Interconnectedness in the global financial market (2017) Downloads
Working Paper: Interconnectedness in the Global Financial Market (2016) Downloads
Working Paper: Interconnectedness in the global financial market (2016) Downloads
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jimfin:v:110:y:2021:i:c:s0261560620302369

DOI: 10.1016/j.jimonfin.2020.102280

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