Contagion or interdependence? Comparing spillover indices.

Area of Science:

• Financial economics
• Econometrics
• Network analysis

Background:

• Understanding market interdependence is crucial for financial stability.
• Existing measures often rely on ex post crisis data, limiting proactive risk identification.
• Identifying epidemic markets and contagion dynamics remains a challenge.

Purpose of the Study:

• To propose a novel risk measure for identifying epidemic markets and contagion.
• To compare spillover measures across 30 global equity markets, including crisis periods.
• To analyze the transmission of risk and interdependence in financial markets.

Main Methods:

• Comparing high-frequency time-varying volatility with low-frequency return spillover estimates.
• Developing a novel risk measure based on volatility and spillover dynamics.
• Empirical analysis of 30 global equity markets to detect contagion and interdependence.

Main Results:

• The proposed measure effectively identifies markets exhibiting epidemic interdependence and emerging contagion.
• Crises periods are identified by the model, rather than relying on ex post information.
• Highly interrelated markets, such as China, show a reduced likelihood of transmitting global crises under current settings.

Conclusions:

• The novel risk measure provides a dynamic approach to understanding market contagion.
• The findings suggest that market interdependence can mitigate crisis transmission in certain highly integrated markets.
• This approach offers valuable insights for policymakers and investors in managing systemic risk.