Dynamics of international spillovers and interaction: Evidence from financial market stress and economic policy uncertainty

Abstract

This study examines the volatility (stress) spillovers in stock, securitized real estate, bond, and currency markets and the economic policy uncertainty spillovers across seven countries. We find that spillovers are important and account for, respectively, about 72% and 50% of the dynamics of financial market stress and economic policy uncertainty across the seven economies examined. Our results suggest a bulk of financial market stress and policy uncertainty are due to international spillovers. In the multi-country context, we find some evidence of policy uncertainty spillovers lead financial market stress spillovers. Thus, changes in international economic policy uncertainty spillovers may be a short-term predictor of changes in international financial market risk spillovers. Our analysis provides the first evidence regarding the link among the international spillovers in multi-country systematic risks. Policymakers who aim to make effective macroeconomic policies in this interconnected global environment should take these findings into account.