Risk contagion network and characteristic measurement among international financial markets

Binxia Chen, Yuanying Jiang and Donghai Zhou

Pacific-Basin Finance Journal, 2025, vol. 92, issue C

Abstract: To establish an effective system for managing systemic financial risk, it is critical to understand and prevent contagion between cross-country financial assets. We provide an in-depth analysis of international linkages across markets (stock, bond and foreign exchange), analyzing the dynamics of the linkages in terms of three key levels, namely, returns, volatility and tail risk correlations, as well as an event-based research methodology. For the first time, we propose a multidimensional framework for analyzing the stability of financial networks, based on the consideration of an individual market, asset diversity, and national financial systems. The results show that European market in particular highlights the “too connected to fail” phenomenon, which is consistent at the level of returns, volatility and tail correlations. Crisis events or extreme adverse conditions increase the correlation between global financial markets, increasing the intensity and efficiency of contagion between and within developed and emerging markets. The comprehensive impact of the Italian financial market increased particularly during these periods, especially in terms of its linkages with the core European economies. Meanwhile, the results of the simulated attacks show that the financial systems of countries in Europe and the Americas, such as the UK, France, and Germany, are critical to the stability of the network, especially their stock and bond markets. In particular, the stock market is the most critical to financial stability. Stock markets, especially in Mexico and South Africa, is the key link between emerging and developed markets.

Keywords: International financial markets; Different classes of assets; Complex networks; Tail risk correlations; Simulated attacks and financial stability (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:eee:pacfin:v:92:y:2025:i:c:s0927538x25001039

DOI: 10.1016/j.pacfin.2025.102766

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