Dynamic Contagion of Systemic Risks on Global Main Equity Markets Based on Granger Causality Networks

Liangrong Song,Qiuhong Zheng

doi:10.1155/2018/9461870

Abstract

A total of 156 Granger causal networks of stock markets are constructed by using the Granger causality test and time series sliding window based on stock index data of 34 major stock markets in the world from 2004 to 2017. The topological structures and evolution characteristics of the Granger causal networks are analyzed from the perspective of complex network theory. Empirical results demonstrate that the network topology has a significant difference during the global financial crisis and other periods. The causal relationships among different global stock markets exhibit a jump growth when each major crisis occurs. The contagion path is also short. A causal relationship between any two stock markets can usually be established with one stock market on average, not by using more than five stock markets. For risk contagion, the American stock markets exerted the largest influence in 12 years, followed by the European stock markets. Stock markets with high intermediate contagion ability play an important role in systemic risk contagion. Despite the crucial markets in Europe and America (e.g., USA, Brazil, and Mexico), stock markets with weak network correlation and strong media ability (e.g., the markets of Japan, Korea, Australia, and New Zealand) play a critical role in risk contagion.

Highlights

The American subprime mortgage crisis reignited the intense concern of economists regarding financial systemic risk
Studying complicated causal relations of different stock markets is equal to studying causality network characteristics of stock market, including time-varying and important node characteristics
Based on the established 156 Granger causality networks that change with time, important network nodes, and the differences of network topology before, during, and after financial crisis were analyzed by calculating out-degree and in-degree of network nodes

Summary

Introduction

The American subprime mortgage crisis reignited the intense concern of economists regarding financial systemic risk. The interaction of such price fluctuation is further intensified by the significant convergence, correlation, and systemic risk contagion in the financial market. Existing literature minimally addresses the directed and dynamic systemic risk contagion among global major stock markets. To this end, we propose using Granger causality measure of connectedness to construct the directed network. Granger causality network can best describe the systemic risk contagion among global major stock markets. The source of systemic risk contagion and important nodes according to the complicated relationships of yield spillover and systemic risk contagion among research markets in a directed causal network were identified.

Data and Research Methods

Empirical Results

JK H G

Conclusions