Structural Impact of the US Financial Stress on the Connectedness Between Asian Economies: Evidence From the Quantile Connectedness Approach

Abstract

This study investigates financial stress connectedness across diverse levels of stress using the novel quantile connectedness methodology between 10 Asian economies and the United States considering 15 years of data. We find that the size of connectedness increases due to the spillover of financial stress shock at both higher (right tail) and lower (left tail) quantiles than at the median. However, the impact of US financial stress on the regional connectedness of Asian countries is relatively larger at the median quantile than at the 5th and 95th quantiles. This impact is very marginal for European countries across the quantiles. Hong Kong and Singapore emerged as the major economies across the quantiles of financial stress shock spillover both in the regional and global systems. In the rolling window framework, while the total financial stress spillover indices vary in a small range, the net directional position of each country changes from transmitter to receiver of financial stress and vice versa throughout the study period in both regional and global systems. The major policy implication for the Asian countries is to bring regional orientation to their policies related to trade and capital flows.