Contagion or interdependence? Comparing spillover indices

Abstract

We propose a novel risk measure that is built on comparing high-frequency time-varying volatility and low-frequency return spillover estimates. This measure permits to identify the markets that are epidemic in their complex interdependence. We conjecture that initially a highly volatile market experiences episodes of risk transmission, but only later absorbs risk and becomes an epidemic market. Moreover, we can detect newly emerging ‘contagion’ in the system. We examine the behaviour of 30 global equity markets and compare spillover measures, which encapsulate many large and small crises episodes. Instead of relying on ex post crisis information, our model identifies crises periods. An important implication of the proposed approach is that highly interrelated markets, such as China, are less likely to transmit a global economic crisis under the current interdependence setting.

Risk contagion in financial markets: A systematic review using bibliometric methods

“…For example, there is a significant increase in the number of studies centred around contagion. However, only a fraction defines contagion and interdependence separately, and even less so attempts to distinguish these terms empirically (Islam & Volkov, 2022). Another issue that has emerged from the extant literature is the imprecise identification of the constituents of a crisis, ranging from asset price decline, bank run-on, or even institutional bankruptcies (Romer & Romer, 2015).…”

“…Another issue that has emerged from the extant literature is the imprecise identification of the constituents of a crisis, ranging from asset price decline, bank run‐on, or even institutional bankruptcies (Romer & Romer, 2015). There are also numerous debates and discussions concerning properties of empirical methodologies on volatility spillovers and financial contagion in the current literature (Islam & Volkov, 2022; Rigobon, 2019). Most recently, with the outbreak of COVID‐19, a bunch of studies have addressed the catalyst role and economic impacts of the coronavirus pandemic on financial contagion (i.e., Corbet, Hou, Yang, Larkin, & Oxley, 2020; Corbet, Hou, Yang, Lucey, & Oxley, 2021; Corbet, Larkin, & Lucey, 2020; Goodell, 2020; Sharif, Aloui, & Yarovaya, 2020; Yarovaya, Brzeszczynski, et al, 2022; Yarovaya, Matkovskyy, & Jalan, 2022).…”