Early-warning signals of risk contagion among global stock markets: evidence from community-level

ABSTRACT

In this article, we first identify the community-level structure of risk contagion among global stock markets and then provide the follow-up early-warning signals. The findings underscore the geographic nature of risk communities and their market composition heterogeneity. The core structure of risk contagion among global stock markets can be characterized by the relationship among a small number of communities that are highly coincided with geographic regions of Asia–Oceania, Europe and the Americas. Especially, we observe a more prominent role of emerging markets in communities of the Americas and Asia–Oceania. Moreover, our early-warning signals show that risk contagion within the European community and the outward spillovers to others are more pronounced. Risk spillovers from the community of Asia–Oceania to the Americas cannot be ignored either. The empirical findings may help develop the concept of top-down hierarchical real-time risk management. Risk contagion of markets in Europe and Asia–Oceania should also be attached more importance in the future early-warning system.

KEYWORDS:

• Risk contagion
• early-warning
• community-level
• global stock markets

JEL CLASSIFICATION:

• C22
• G15

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

¹ The classification of developed and emerging markets refers to International Finance Corporation.

² The value of each stock market can be obtained from World Federation of Exchanges.

³ We set the rolling step and forecast step to be $R=1$ and $H=10$.

⁴ The number of factors $r=3$ is determined by scree method.

Additional information

Funding

This work was financially supported by the Scientific Research Foundation for Young Teachers in Capital University of Economics and Business under [Grant No. XRZ2021038] and the Postdoctoral Science Foundation of China under [Grant No. 2020M680839].