Measuring the G20 stock market return transmission mechanism: Evidence from the R² connectedness approach

Abstract

This study examines the contemporaneous transmission mechanism across the G20 stock market returns employing a novel R2 connectedness framework which combines the network approach of Kenett et al. (2010, 2015) with the connectedness approach of Diebold and Yilmaz (2012, 2014). The employed daily dataset covers G20 stock market returns from January 3rd, 2000 until June 30th, 2022. We find that the dynamic total connectedness is heterogeneous over time and economic event dependent. Furthermore, pairwise R2 decomposed connectedness measures with respect to different crisis periods and dynamic net total directional connectedness measures are discussed. Findings are important for investors and portfolio managers, for risk diversification purposes, as they highlight important dynamics across the markets of interest. We illustrate the reliability of our findings by considering a battery of robustness tests.