Interconnectedness in the Global Financial Market

37 Pages Posted: 8 Oct 2016

See all articles by Matthias Raddant

Matthias Raddant

Kiel Institute for the World Economy

Dror Y. Kenett

Financial Industry Regulatory Authority (FINRA); Johns Hopkins University

Date Written: September 27, 2016

Abstract

The global financial system is highly complex, with cross-border interconnections and interdependencies. In this highly interconnected environment, local financial shocks and events can be easily amplified and turned into global events. New models are needed to capture the structure of the global financial village and uncover channels of spillover and contagion. This paper analyzes the dependencies among nearly 4,000 stocks from 15 countries. The returns are normalized by the estimated volatility using a GARCH model and a robust regression process estimates pairwise statistical relationships between stocks from different markets. The estimation results are used as a measure of statistical interconnectedness, and to derive network representations, both by country and by sector. The results show that countries like the United States and Germany are in the core of the global stock market. The energy, materials, and financial sectors play an important role in connecting markets, and this role has increased over time for the energy and materials sectors. The framework provides the means to monitor interconnectedness in the global financial system on different aggregation levels, and to show how they evolve in time.

Keywords: asset markets, comovement, financial networks, interconnectedness

JEL Classification: G15, G11, C58

Suggested Citation

Raddant, Matthias and Kenett, Dror Y., Interconnectedness in the Global Financial Market (September 27, 2016). OFR WP 16-09, Available at SSRN: https://ssrn.com/abstract=2848348 or http://dx.doi.org/10.2139/ssrn.2848348

Matthias Raddant

Kiel Institute for the World Economy ( email )

P.O. Box 4309
Kiel, Schleswig-Hosltein D-24100
Germany

Dror Y. Kenett (Contact Author)

Financial Industry Regulatory Authority (FINRA) ( email )

Washington, DC
United States

Johns Hopkins University ( email )

Baltimore, MD 20036-1984
United States

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