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

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.