Economic Policy Uncertainty, Financial Stress, and Cross-Country Risk Spillovers: Evidence from Global Stock Markets
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Abstract
This study examines how economic policy uncertainty intensifies cross-country financial risk spillovers by amplifying pressures within the financial system. Using daily stock market data from 15 economies, we estimate a high-dimensional time-varying parameter vector autoregression model and construct a dynamic directional risk-spillover network that measures time-varying risk outflows, inflows, and net spillovers across markets. Economic policy uncertainty and financial stress are then incorporated into a two-way fixed-effects panel model, followed by bootstrap mediation tests of the transmission pathway from policy uncertainty through financial stress to risk spillovers. The global equity spillover network displays a pronounced peak-heavy-tail pattern: the mean total spillover index is 70.97%, and the index frequently exceeds 85% during extreme shocks. Benchmark regressions show that domestic economic policy uncertainty significantly increases a country’s risk outflows, whereas global financial stress primarily amplifies external risk inflows. The mediation tests further establish financial stress as a pivotal intermediary in the uncertainty-transmission mechanism. These findings support the development of cross-country risk early-warning systems that monitor financial stress and strengthen international coordination of macroprudential policy under heightened global uncertainty.
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