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

Author

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  • Candelon, Bertrand

    (Université catholique de Louvain, LIDAM/LFIN, Belgium)

  • Ferrara, Laurent
  • Joëts, Marc
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.

Suggested Citation

  • Candelon, Bertrand & Ferrara, Laurent & Joëts, Marc, 2021. "Global financial interconnectedness: a non-linear assessment of the uncertainty channel," LIDAM Reprints LFIN 2021003, Université catholique de Louvain, Louvain Finance (LFIN).
  • Handle: RePEc:ajf:louvlr:2021003
    DOI: https://doi.org/10.1080/00036846.2020.1870651
    Note: In: Applied Economics, 2021
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    More about this item

    Keywords

    Finance ; financial markets ; network interconnectedness ; uncertainty ; non-linear model;
    All these keywords.

    JEL classification:

    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • C31 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Cross-Sectional Models; Spatial Models; Treatment Effect Models; Quantile Regressions; Social Interaction Models
    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations

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