The Cross-Border Interaction of Financial Stress : From the Perspective of Pattern Causality

Based on the interactions of symbolic dynamics (patterns) in reconstructed attractors, this study conducted a multi-type recognition of the cross-border causality of financial stress, which can be characterized as positive, negative, or dark causality. Using the financial stress index, empirical studies were conducted on the financial markets of China, the U.S., and the Euro area. The following conclusions were obtained. In most cases, the positive causality of financial stress dominates, followed by dark causality. The positive causality between financial stress is enhanced in periods of extensive stress. Financial stress in different markets rises and falls simultaneously. When stress is released, positive causality declines, and dark causality increases. Dependence structures are hidden and become opaque. The causality of different financial markets shows some heterogeneity; the positive causality of financial stress is stronger in advanced economies. In contrast, the dark causality between China and the U.S. (Euro area) is more evident than that between other advanced economies. This implies more uncertainty regarding the cross-border dependence of emerging economies