International risk transmission of stock market movements

The Great Recession of 2007-2009 originated in the United States has brought to the surface the need for measuring and monitoring the transmission of extreme downside market risk. This paper investigates the international risk transmission mechanism between the US and major Asian stock markets. By applying two recently introduced test statistics based on cross-quantilogram function, we confirm the existence of risk spillover from the US to major Asian stock markets, as well as the feedback effect. Furthermore, we apply the multivariate quantile regression model (VAR for VaR) to quantitively uncover these tail-interdependency patterns, showing how the extreme downside risk transmits between the US and Asian markets. Our results suggest these stock markets are highly integrated in terms of risk transmission. The shocks in the US market substantially increase the Value at Risk (VaR) in the Asian markets, except China and Russia. On the other hand, price drops in the Asian markets also have a weaker but significant predictive power for risk in the US market. By investigating the time-varying pattern of the risk interdependency structure, we further show a rising trend of cross-country risk linkages over time. We also document considerable asymmetric patterns in the international transmission mechanism of stock market movements, highlighting the underlying weakness of adopting volatility to measure the market risk.