Imported financial risk in global stock markets: Evidence from the interconnected network

Abstract

This paper proposes an interconnected network, including the volatility layer and sentiment layer, to examine imported financial risk in global stock markets. We compare and explore the topology structures of global volatility risk spillovers and sentiment risk spillovers based on the static sample and dynamic sample. Our results show that sentiment risk spillovers across global stock markets are stronger than volatility risk spillovers. Meanwhile, we observe that volatility risk spillovers and sentiment risk spillovers among global stock markets are heterogeneous during periods of financial system stress. The market-level analysis suggests that developed economies, such as the US, UK, and France, are dominant players in global volatility risk and sentiment risk. Finally, we observe that Asian stock markets suffered from substantial imported volatility risks during the crisis, but imported sentiment risks in Asian stock markets are weak.