Fear, Fragility, and the Nonlinear Transmission of Global Shocks

Abstract

Global shocks do not affect all countries equally. Using daily data for 37 equity markets from 1986 to 2025, we show that exposure to global risk rises nonlinearly during periods of elevated fear, but the magnitude of this amplification differs substantially across countries. We show that countries with higher inflation and greater dependence on external financing exhibit significantly stronger nonlinear responses to global shocks, whereas trade integration dampens the response. These structural characteristics explain an important share of cross-country heterogeneity in global risk transmission and are associated with systematically greater crisis amplification during periods of severe market stress.

Keywords: Contagion, Asset Pricing, International Finance, Comovement, Correlation, Fear

JEL Classification: F65, G11, G12, G14, G15, G20