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Global financial risk and market connectedness: An empirical analysis of COVOL and major financial markets

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  • Lang, Chunlin
  • Xu, Danyang
  • Corbet, Shaen
  • Hu, Yang
  • Goodell, John W.

Abstract

This study presents a novel investigation into the dynamic connectedness between the recently developed global risk measure, COVOL, created by Engle and Campos-Martins (2023), and the major international stock, gold, and crude oil markets in China, the US and Europe. Applying conditional and aggregated connectedness approaches, we systematically uncover the multi-dimensional interlinkages to understand volatility transmissions within these markets. Results reveal that COVOL predominantly receives volatility transmissions, with the US and European stock markets acting as principal transmitters of shocks across all three regional systems. The research also highlights the crucial role of significant events, such as the Global Financial Crisis, the Chinese stock market crash, and the COVID-19 pandemic, when increasing the intensity of connectedness. The volatility transmission of the COVOL-gold pairing is comparatively weaker than the COVOL-stock and COVOL-oil pairs. At the same time, the US and Europe consistently transmit stronger shocks to global financial risk, contributing significantly to the global risk transmission channel, whereas, in contrast, China’s financial markets transmit less international uncertainty. Robustness testing verifies these findings.

Suggested Citation

  • Lang, Chunlin & Xu, Danyang & Corbet, Shaen & Hu, Yang & Goodell, John W., 2024. "Global financial risk and market connectedness: An empirical analysis of COVOL and major financial markets," International Review of Financial Analysis, Elsevier, vol. 93(C).
    • Handle: RePEc:eee:finana:v:93:y:2024:i:c:s105752192400084x
    DOI: 10.1016/j.irfa.2024.103152
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    Keywords

    Global financial risk; Dynamic connectedness; COVOL; Stock markets; Commodity markets; Volatility transmission; Financial crisis;
    All these keywords.

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics
    • G01 - Financial Economics - - General - - - Financial Crises
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation
    • F3 - International Economics - - International Finance

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