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Dynamic Connectedness Of Financial Stress Across Advanced And Emerging Economies: Evidence From Time And Frequency Domains

Author

Listed:
  • TRINH QUANG LONG

    (Asian Development Bank Institute, Tokyo, Japan)

  • LAN HOANG NGUYEN

    (Credit Risk Database Association, Tokyo, Japan)

  • PETER J. MORGAN

    (Asian Development Bank Institute, Tokyo, Japan)

Abstract
This study analyzes the dynamic connectedness (i.e., spillovers and spillbacks) of financial stress across advanced and emerging economies. As proxy for financial stress, we reconstruct the financial stress index (FSI) for 16 advanced economies and 15 emerging economies from January 1997 to August 2020. The constructed FSIs reflect combined stress level in banking sectors, equity markets, capital markets and exchange rate markets. Using frameworks proposed by Diebold and Yilmaz (Better to give than to receive: Predictive directional measurement of volatility spillovers. International Journal of Forecasting, 28(1), 57–66) and Baruník and Křehlík (Measuring the frequency dynamics of financial connectedness and systemic risk. Journal of Financial Econometrics, 16(2), 271–296), we find that there is strong connectedness of financial stress across economies. Moreover, the connectedness of the financial stress is stronger after the global financial crisis and during the COVID-19 pandemic. Although the spillover of shocks is strongest in the short-term horizon, the spillovers in the longer-term horizons are not trivial. Our results also show that the US is the largest shock transmitter as well as one of the largest shock receivers. Our results also suggest that shocks originating in advanced economies have strong effects on other economies, but shocks originating in emerging economies also play an increasing role. Global factors such as global economic policy uncertainty and geopolitical risks influence the magnitude of the spillover of financial stress.

Suggested Citation

  • Trinh Quang Long & Lan Hoang Nguyen & Peter J. Morgan, 2024. "Dynamic Connectedness Of Financial Stress Across Advanced And Emerging Economies: Evidence From Time And Frequency Domains," The Singapore Economic Review (SER), World Scientific Publishing Co. Pte. Ltd., vol. 69(02), pages 751-791, March.
    • Handle: RePEc:wsi:serxxx:v:69:y:2024:i:02:n:s0217590821410125
    DOI: 10.1142/S0217590821410125
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    More about this item

    Keywords

    Financial stress index; dynamic connectedness; spillovers; emerging markets; time domain; frequency domain;
    All these keywords.

    JEL classification:

    • C38 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Classification Methdos; Cluster Analysis; Principal Components; Factor Analysis
    • E10 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - General
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy

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