Financial stress spillovers in advanced economies

Financial stress co-movements are positively associated with crisis periods. Dynamic conditional correlations increase during periods of high uncertainty. The US is the dominant transmitter of financial stress spillovers. The total stress spillover index explains 19.9% of the forecast error variance. On average, 20.9% of the volatility forecast error variance comes from spillovers.. In this study, we examine financial stress co-movements and spillovers among the G7 economies by employing a financial stress index as a proxy variable and accounting for financial instability. To examine the interdependence of financial stress, we parse the dynamic conditional correlations of financial stress among these countries for the 1981-2009 period. In addition, we present spillover indices and plots of financial stress that indicate financial stress innovations and spillover dynamics, respectively. Our empirical results suggest a positive association of financial stress co-movements and spillovers with both financial crises and uncertainty. In general, our findings provide a clear view of the transmission of financial stress during important stressful episodes, suggesting the existence of an increased interplay among the financial markets