Extreme risk connectedness among global major financial institutions: Links to globalization and emerging market fear

Abstract

Using high frequency data and “realized jumps” to depict extreme risk of stock returns, we propose a novel empirical framework to estimate and visualize the network structure of extreme risk among the global major financial institutions. With this model, we construct a series of indices to describe how the extreme risk connectedness evolves over time at the institution, country and global levels, and study the underlying factors driving the connectedness. Our results show that the degree of globalization, in particular, political globalization plays the most important role in driving a country’s importance in global extreme risk propagation. We also identify the “emerging market fear”, which is evidenced by the increased importance of emerging countries in the global financial extreme risk propagation; the increased proportion of emerging market-based institutions in the systemically important financial institution cohort; and a stronger granular impact of emerging market extreme risk on the global financial market stability. These results have important implications on managing systemic risk of global financial system.