Shocks and global asset market connectedness

Abstract

This chapter analyzes volatility spillovers across the global stock, bond, foreign exchange, and commodity markets from 2007 to 2022 using the Diebold-Yilmaz connectedness methodology. The volatility connectedness increases substantially during periods of stress in global asset markets. Aside from the jumps in the connectedness index, it is possible to identify a long-run downward trend in the connectedness index from the global financial crisis through the end of 2017. Immediately after hitting a minimum level, the index followed an upward trend. This trend became more robust following the Covid-19 shock of March 2020, Russia’s invasion of Ukraine, and the surge in inflation in 2022. Most of the sudden jumps in the volatility connectedness have been due to the increased connectedness across asset classes rather than the within-asset classes. Stocks are the asset class that generated the highest level of volatility connectedness to others, followed by bonds and foreign exchange. Commodities are the asset class that receives the most connectedness from other asset classes.