Risk spillover effect of global financial markets in the context of novel coronavirus epidemic

ABSTRACT

Since the outbreak of COVID-19 pandemic, the financial markets of many countries have been impacted severely. In this context, based on the event study method and orthogonal decomposition method, this paper studies the impact of the novel coronavirus epidemic on the spillover effect of global financial risk, and further analyses the financial risk transmission channels of various countries. The results suggest that the novel coronavirus significantly increases the overall risk level of global financial markets, and exacerbates the contagion effects of financial risk through the global risk spillover network. In addition, the analysis of transmission channels reveals the source and direction of the financial risks in each country, manifesting as the unidirectional risk transmissions from developed countries to developing countries and the bidirectional risk contagion paths of countries with similar level of development. Therefore, facing the challenges of public health emergencies such as novel coronavirus epidemic, the major economies should strengthen multilateral cooperation and promote the coordination of macroeconomic policies to jointly defuse global systemic financial risk.

KEYWORDS:

• COVID-19 pandemic
• financial stress
• event study method
• orthogonal decomposition method
• spillover network

JEL CLASSIFICATION:

• G15
• I18

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

¹ The source of the data is the World Bank’s publication of the world’s GDP for 2019.

² The country codes are Brazil(BRA), Canada(CAN), China(CHN), France(FRA), India(IND), Japan(JPN), Russia(RUS), South Africa(ZAF), United Kingdom(GBR), United States(U.S.A).