Financial Contagion: Global Transmission of Systemic Risk

DOI: 10.20542/0131-2227-2017-61-1-17-28

M. Shchepeleva (,
Bank of Russia, 12, Neglinnaya Str., Moscow, 107016, Russian Federation;
MGIMO-University, 76, Vernadskogo Prosp., Moscow, 119454, Russian Federation 

Abstract. The article studies financial shock transmission mechanisms and cross-country  linkages that make it possible. Given increased interconnections around the globe  there is general agreement that in recent time financial system has become much more  vulnerable to exogenous shocks. The main channels of transmission are trade and  financial linkages among nations. The former are more traditional for developing  countries while the latter – for developed markets. The appetite of global investors  to risk, the level of uncertainty and information asymmetry in the global financial  market are also important factors which can influence the magnitude of shock  transmission. The article gives an overview of different methods to calculate the  risks of financial shock transmission across countries including correlation and  volatility analysis, contingent claims analysis, econometric models with a global  factor and different types of VAR (VEC). Using the method of forecast error variance  decomposition from a vector auto regression, first proposed by F. Diebold and K.  Yilmaz to analyze stock markets interconnectedness, the author quantifies directions  of financial shock spillovers in equity, government bond and real estate markets.  This methodology was applied to 10 countries. It was found that US, Germany and  France are the major transmitters of shocks to other countries. The results point to  a slight difference in the magnitude of transmission in different sectors: stock  markets tend to suffer more from spillover effects while government bond markets are  more sensitive to internal factors of instability. The article also discusses various  approaches to global systemic risk modeling which is a new area of research in recent  time. Regulatory reforms which began in the post-crisis period are considered to be a  necessary condition to decrease the intensity of financial shocks transmission.  Taking into account how fast the shocks spillover across countries, recovery from the  recession requires in the first place coordinated policy actions among governments.

Keywords: systemic risk, financial spillovers, variance decomposition, transmission of financial shocks, financial regulatory system 


1. International Monetary Fund. Consolidated Spillover Report. 2011. Available at: (accessed 2.02.2016).

2. Chinn M., Forbes K.A Decomposition of Global Linkages in Financial Markets. The Review of Economics and Statistics, 2004, vol. 86, no. 3, pp. 705-722.

3. Moser Th. What Is International Financial Contagion? International Finance, 2003, vol. 6, no. 2, pp. 157-178. DOI:10.1111/1468-2362.00113.

4. Krugman P. The International Finance Multiplier. 2008. Available at: (accessed 29.07.2016).

5. Galesi A., Sgherri S. Regional Financial Spillovers across Europe: a Global VAR Analysis. IMF Working Paper. 2009, no. 09/23. 32 p.

6. Adam T., Benecka S. Financial Stress Spillover & Financial Linkages between the Euro Area & the Czech Republic. Czech Journal of Economics and Finance, 2013, vol. 63, no. 1, pp. 46-64.

7. Goldstein M. The Asian Financial Crisis Causes, Cures, and Systematic Implications. Washington, Institute of International Economics, 1998. 77 p.

8. Forbes K., Rigobon R. No Contagion, Only Interdependence: Measuring Stock Market Co-movements. NBER Working Paper. 1999, no. 7267. 39 p.

9. Frank N., Hesse H. Financial Spillovers to Emerging Markets during the Global Financial Crisis. IMF Working Paper. 2009, no. 09/104. 20 p.

10. Gonzalez-Hermosillo V., Hesse H. Global Market Conditions and Systemic Risk. IMF Working Paper. 2009, no. 230. 22 p.

11. Balakrishnan R., Danninger S., Elekdag S., Tytell I. The Transmission of Financial Stress from Advanced to Emerging Economies. IMF Working Paper. 2009, no. WP/09/133. 52 p.

12. Pesaran M., Smith R. Macroeconometric Modelling with a Global Perspective. CESifo Working Paper Series. 2006, no. 1659. 23 p.

13. Chen Q., Gray D., N’Diaye P., Oura H., Tamirisa N. International Transmission of Bank and Corporate Distress. IMF Working Paper. 2010, no. 10/124. 43 p.

14. Koop G., Pesaran M., Potter S. Impulse Response Analysis in Nonlinear Multivariate Model. Journal of Econometrics, 1996, no. 74, pp. 119-147.

15. Diebold F., Yilmaz K. On the Network Topology of Variance Decompositions: Measuring the Connectedness of Financial Firms. NBER Working Paper 2011, no. 17490. 36 p.

16. Sullivan R., Peterson S., Waltenbaugh D. Measuring Global Systemic Risk: What Are Markets Saying about Risk? Journal of Portfolio Management, 2010, vol. 37, no.1, pp. 67-77.

17. Volatility Institute (V–LAB). Available at: (accessed 05.05.2016).

18. Brownlees T., Engle R. SRISK: A Conditional Capital Shortfall Index for Systemic Risk Measurement. Unpublished Working Paper, 2015. Available at: (accessed 29.07.2016).

19. International Monetary Fund. Financial Stability Report. April 2015. Available at: (accessed 29.07.2016).

20. IMF Urges Rethink of How to Manage Global Systemic Risk. IMF Survey Magazine. Available at: (accessed 29.07.2016). 

Registered in System SCIENCE INDEX

For citation:
Shchepeleva M. Financial Contagion: Global Transmission of Systemic Risk. World Eonomy and International Relations, 2017, vol. 61, no. 1, pp. 17-28.

Comments (0)

No comments

Add comment






Dear authors! Please note that in the VAK List of peer-reviewed scientific journals, in which the main scientific results of dissertations for the degree of candidate and doctor of sciences should be published for the “MEMO Journal” the following specialties are recorded:
economic sciences:
5.2.5. World Economy.
5.2.1. Economic Theory
5.2.3. Regional and Branch Economics
political sciences:
5.5.4. International Relations
5.5.1. History and Theory of Politics
5.5.2. Political Institutions, Processes, Technologies


Current Issue
2024, vol. 68, No. 5
Topical Themes of the Issue:
  • Are There Any Ways to Break Through the Korean Nuclear Impasse?
  • Contemporary U.S. Taiwan Policy: Balancing on the Edge
  • The Gulf Monarchies’ Vision of the Global Order Transformations and the Russian Place in It
  • At Post-Soviet Space
Submit an Article
The Editorial Board invites authors to write analytical articles on the following topics:
  • changes in the processes of globalization in modern conditions
  • formation of the new world order
  • shifts in civilization at the stage of transition to a digital society

The editors are also interested in publishing synthesis articles / scientific reviews revealing the main trends in the development of certain regions of the world - Latin America, Africa, South Asia, etc.