Financial Stress Connectedness and Network Analysis

Abstract

Financial instability in one country may quickly spread out to the rest of the world on different transmission channels. This leads to financially connected countries and creates a risk of rapid contagion of the financial crisis. The last global financial crisis was an example of this contagion effect. Therefore, the financial connectedness of both developed and developing countries is very important in order to determine the spillovers of financial stress across countries. In this study, we follow Diebold and Yilmaz approaches and examine total, directional and net spillovers between high frequency (daily) financial stress indexes of 9 countries from 2007/03/17 through 2016/11/17. In addition, we analyze the 200-day rolling window of the total spillover index with well-known financial stress events. Finally, the network topology of directional spillovers is given to visualize financial connectedness.