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Calm before the storm: an early warning approach before and during the COVID-19 crisis

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Islam, R and Volkov, V ORCID: 0000-0001-9721-9700 2020 , Calm before the storm: an early warning approach before and during the COVID-19 crisis.

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Abstract

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.

Item Type: Report (Discussion Paper)
Authors/Creators:Islam, R and Volkov, V
Keywords: Systemic risk, networks, COVID-19
Publisher: University of Tasmania
Copyright Information:

Copyright 2020 University of Tasmania

Additional Information:

Discussion Paper Series N 2020-09
JEL Classification Numbers: C3,C32,C45,C53,D85,G10

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