International Tail Risk Connectedness: Network and Determinants

52 Pages Posted: 7 Jun 2019

See all articles by Linh Nguyen

Linh Nguyen

De Montfort University

Brendan Lambe

Alfaisal University

Date Written: May 20, 2019

Abstract

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

Suggested Citation

Nguyen, Linh and Lambe, Brendan, International Tail Risk Connectedness: Network and Determinants (May 20, 2019). Available at SSRN: https://ssrn.com/abstract=3391545 or http://dx.doi.org/10.2139/ssrn.3391545

Linh Nguyen (Contact Author)

De Montfort University ( email )

The Gateway
Leicester, LE1 9BH
United Kingdom

Brendan Lambe

Alfaisal University ( email )

Riyadh
United Kingdom

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