Global financial interconnectedness: a non-linear assessment of the uncertainty channel

Candelon, Bertrand; Ferrara, Laurent; Joëts, Marc

Global financial interconnectedness: a non-linear assessment of the uncertainty channel

Bertrand Candelon, Laurent Ferrara and Marc Joëts

No 2021003, LIDAM Reprints LFIN from Université catholique de Louvain, Louvain Finance (LFIN)

Abstract: The role of uncertainty in the global economy is now widely recognized by policy-makers but its specific effects on the international financial system are less understood. ln this paper, we assess the impact of uncertainty fluctuations on the interconnectedness within the international system of equity prices. ln this respect, we extend the measure of connectedness put forward by Diebold and Yilmaz 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 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: Finance; 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)
Date: 2021-01-01
Note: In: Applied Economics, 2021
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Citations: View citations in EconPapers (6)

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Persistent link: https://EconPapers.repec.org/RePEc:ajf:louvlr:2021003

DOI: 10.1080/00036846.2020.1870651

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