Global Volatility Spillovers and Financial Contagion: Evidence from Developed, Emerging, and Frontier Equity Markets during the SVB and Credit Suisse Crises

Abstract

The 2023 volatility in the banking sector, with the failure of Silicon Valley Bank (SVB) and the near-collapse of Credit Suisse, serves as a unique event to study the potential transmission of volatility across varying heterogeneous market structures. Utilizing GARCH(1,1) volatility estimates, event-driven comparisons, and Diebold–Yilmaz variance decomposition, we analyse the transmission of volatility across 15 equity markets (developed, emerging, and frontier markets), and the MSCI World Index. From January 2021 to December 2023, we collected 756 daily observations for each market. In our analysis, we found a high level of volatility persistence (α + β = 1) and high values of kurtosis during the study period which indicate the presence of clustering of extreme values. The banking sector disruptions resulted in asymmetric responses across the markets. In the advanced markets, we observed high volatility that reversed over a very short time period, whereas, in the less developed markets, we observed prolonged volatility adjustments. In our study, we found values for the Total Connectedness Index (TCI) that were consistently over 120%. Canada and the United Kingdom were the main producers of volatility, while Japan appeared to be the main consumer of volatility. In particular, some of the frontier markets appeared to show possible insulation or alternative risk dynamics and showed no signs of immediate contagion as evidenced by the reduced volatility observed during the event windows. These observations illustrate the regional dependence of volatility and the need for a macro-prudential framework that incorporates the development gaps associated with varying levels of shock absorption and the speed of transmission.