International Tail Risk Connectedness: Network and Determinants
52 Pages Posted: 7 Jun 2019
Date Written: May 20, 2019
We develop the full network of directional tail risk connectedness for a system of 32 countries using the Least Absolute Shrinkage and Selection Operator (LASSO) Quantile Regression framework. Our result highlights important features of the tail risk network, including the key drivers, receivers, and transmitters of risk in international financial markets. We then investigate the network determinants and demonstrate the predominant role of the economy size amongst economic and stock market factors. After controlling for this, we present striking evidence of the negative relationship between economic linkage factors such as trade and capital flows, and capital stocks with the cross-country tail risk connectedness. Our observation provides important evidence to support the cheap import, contractual commitment, and diversification effects in international economic relationship.
Keywords: Tail risk network, Economic linkage, International trade flow, International capital investment, Quantile regression, LASSO
JEL Classification: G01, G10, G12, F10, F21, C31
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