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Global Financial Interconnectedness: A nonlinear Assessment of the Uncertainty Channel

Author

Listed:
  • Bertrand Candelon
  • Laurent Ferrara

    (EconomiX - EconomiX - UPN - Université Paris Nanterre - CNRS - Centre National de la Recherche Scientifique)

  • Marc Joëts
Abstract
The role of uncertainty in the global economy is now widely recognized by policy-makers but its effects on the international fi nancial system are less understood. In this paper we assess the impact of uncertainty on the interconnectedness within the international system of equity prices. In this respect, we extend the measure of connectedness put forward by Diebold and Yilmaz (2009) by allowing for non-linear effects through the estimation of a non-linear Threshold VAR model whose regimes depend on the level on uncertainty. Results clearly show that high uncertainty tends to generate more connectedness among equity indexes of a set of advanced and emerging countries. From an economic policy point of view, this result suggests that in the presence of high uncertainty, an adverse financial shock in a speci fic country is likely to propagate more widely and more strongly to the whole fi nancial system. This result advocates for a close real-time monitoring of uncertainty measures.
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Suggested Citation

  • Bertrand Candelon & Laurent Ferrara & Marc Joëts, 2016. "Global Financial Interconnectedness: A nonlinear Assessment of the Uncertainty Channel," Post-Print hal-01667074, HAL.
    • Handle: RePEc:hal:journl:hal-01667074
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    JEL classification:

    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • C31 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Cross-Sectional Models; Spatial Models; Treatment Effect Models; Quantile Regressions; Social Interaction Models
    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations

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