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

Author

Listed:
  • Bertrand Candelon

    () (Université Catholique de Louvain)

  • Laurent Ferrara

    (Banque de France)

  • Marc Joëts

    (QuantCube)

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. In this pa- per we assess the impact of uncertainty fluctuations on the interconnectedness within the international system of equity prices. In this respect, we extend the measure of connected- ness put forward by Diebold and Yilmaz (2009) 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 pol- icy 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

  • Bertrand Candelon & Laurent Ferrara & Marc Joëts, 2019. "Global financial interconnectedness: A non-linear assessment of the uncertainty channel," GRU Working Paper Series GRU_2019_001, City University of Hong Kong, Department of Economics and Finance, Global Research Unit.
  • Handle: RePEc:cth:wpaper:gru_2019_001
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    References listed on IDEAS

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    Keywords

    Finance; Financial markets; Network interconnectedness; Uncertainty; Non-linear model;

    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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