This paper develops a means of visualising the vulnerability of complex systems of financial interactions resulting from the changing risk tolerance of investors. The investors' risk behavior contributes to the buildup of vulnerability in crisis and in calm periods. We show how both time-varying risk tolerance and spillover indices can be translated into two-dimensional information transmission and crisis transmission maps, respectively. Taken together, the information transmission maps have the advantage of highlighting potential crisis transmission pathways in the crisis transmission maps. These maps provide clear visualization showing information transmission predates crisis transmission drawing from conditional signed spillover and risk tolerance indices computed from equity market data for 31 global markets between 1998 and 2020. We examine if investors' risk preference induces a crisis and to what extent such a predictor may be related to a pandemic. Furthermore, we take a special look at the Covid-19 pandemic and its impact on the dynamics of systemic crisis transmission.
History
Department/School
Dept. of Geography and Environmental Studies
Publisher
University of Tasmania
Publication status
Published
Place of publication
Hobart
Rights statement
Copyright 2020 University of Tasmania Discussion Paper Series N 2020-09 JEL Classification Numbers: C3,C32,C45,C53,D85,G10