Dynamic spillovers of various uncertainties to Russian financial stress: Evidence from quantile dependency and frequency connectedness approaches

Abstract

Being geopolitically exposed, the Russian financial sector is vulnerable to various ­uncertainties. The aim of the article is to examine the quantile movements and dynamic connectedness of uncertainty indices with the financial stress index of Russia employing the cross-quantilogram (CQ), recursive cross-quantilogram (R-CQ) and TVP‑VAR dynamic connectedness using monthly data from July 2011 to August 2023. It is found that for Tweeter-based Economic Uncertainty (TEU) and Global Economic Policy Uncertainty (GEPU), there is strong positive dependence on the Russian Financial Stress Index (RFSI) in the bearish states of market in the initial memory, and the strength of this positive spillover effect gradually wilts towards longer memory structures. Unlike the GEPU, Russian Economic Policy Uncertainty (REPU) has long-lasting heterogeneous spillover effects on RFSI. Though there are significant positive, as well as negative, spillover ­effects of Global Geopolitical Risk (GGPR) on RFSI in the initial memory, across the longer­ memory structures these entire heterogeneous effects wash out. However, Russian Geopolitical Risk (RGPR) have long-lasting heterogeneous spillover effects on RFSI, unlike GGPR. GEPU, GGPR and RGPR were the net transmitters while RFSI, TEU and REPU were net receivers of volatility shocks. Since RFSI shows resilience over the long-term horizon to global geopolitics and economic uncertainty, investors are advised to keep patience and hold their capital/investment up to a minimum of 1 year in Russian financial system in order to be rewarded with positive returns.