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The extreme risk connectedness of the global financial system: G7 and BRICS evidence

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  • Chen, Ning
  • Li, Shaofang
  • Lu, Shuai

Abstract

Using daily money, stock, bond, foreign exchange, and credit markets data in the G7 and BRICS between 2006 and 2022, this paper investigates the extreme risk interconnectedness across countries and markets. Specifically, we propose a multilayer nonlinear extreme risk spillover network based on the CAViaR model and nonlinear Granger causality test to capture extreme risk spillovers across and within layers from static and dynamic perspectives, respectively. We find that the extreme risks of the G7 countries are higher than those of the BRICS countries. Simultaneously, extreme risks in the stock and foreign exchange markets are significantly higher than those in other markets. The stock market tends to be the net emitter of extreme risks, and the bond and credit markets tend to be the net recipients. During special event periods, BRICS countries (except Russia) tend to be net recipients of extreme risks. Our study provides new evidence on the interconnectedness of extreme risk across markets and countries, which has several practical implications for managing financial risks and maintaining the financial system’s stability.

Suggested Citation

  • Chen, Ning & Li, Shaofang & Lu, Shuai, 2023. "The extreme risk connectedness of the global financial system: G7 and BRICS evidence," Journal of Multinational Financial Management, Elsevier, vol. 69(C).
    • Handle: RePEc:eee:mulfin:v:69:y:2023:i:c:s1042444x23000312
    DOI: 10.1016/j.mulfin.2023.100812
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    More about this item

    Keywords

    Extreme risks; Spillover effect; Nonlinear Granger causality test; Multilayer network·;
    All these keywords.

    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • F3 - International Economics - - International Finance
    • F5 - International Economics - - International Relations, National Security, and International Political Economy
    • O1 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development

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