Global market interconnectedness: how risks travel during global financial and non-financial crises

Abstract

This study aims to investigate the dynamic interconnectedness and risk transmission mechanisms among major global equity indices over a comprehensive period (1997–2024). By spanning nearly three decades, the research distinguishes how systemic risk propagates during both financial and non-financial global crises. The analysis uses a Time-Varying Parameter Vector Autoregressive (TVP-VAR) framework. This methodology allows for the capture of evolving connectedness patterns and shifts in spillover intensity across different market regimes, providing a granular view of how return shocks transition between stability and turbulence. The results reveal that financial crises, notably the 2008 Global Financial Crisis, are characterized by intense linkages centered around developed markets (S&P 500, DAX, FTSE 100), which act as primary transmitters of systemic risk. In contrast, emerging markets (KOSPI, IBOVESPA) predominantly function as shock absorbers. Non-financial crises display distinct transmission signatures: the COVID-19 pandemic triggered universal spillovers, while geopolitical events, such as the Russia-Ukraine war, localized risk within European indices (DAX, CAC 40). Additionally, the Dotcom Bubble underscored the role of sector-specific volatility, with the NASDAQ serving as the epicenter of contagion. This research contributes to the literature by providing a long-term comparative taxonomy of risk transmission across diverse crisis types. By isolating the idiosyncratic behaviors of markets during financial versus non-financial shocks, the findings offer critical insights for institutional investors and policymakers regarding portfolio diversification and the limits of financial resilience in an increasingly integrated global economy.