Extreme risk spillovers across financial markets under different crises

Abstract

We examine how extreme risk spillovers caused by different crises transmit through financial markets in the US, Europe and Asia-Pacific regions. By modifying the bivariate peak-over-threshold and DCC-GARCH models and using daily negative log-returns from November 1991 to August 2020, we find significant bidirectional extreme risk spillovers with persistent effects between US and other markets. Contributions to extreme risk spillovers vary across crises. The recent COVID-19 shock (non-financial channel) and the 2007–2008 global crisis (financial channel) contribute more to extreme risk spillovers. Moreover, the extreme spillovers in the COVID-19 shock depend more on the non-financial channel compared to the global crisis and cause larger contributions to extreme losses, showing the impact of the non-financial shocks on financial markets. • We investigate how extreme risk spillovers propagate between financial markets in different crisis. • An approach to measure extreme risk spillovers is proposed. • Extreme risk spillovers are persistent and bidirectional. • Extreme risk spillovers transmit through the financial and non-financial channels. • Compared with different crisis, the recent COVID-19 crisis contributes more to extreme risk spillovers.