Financial Market Contagion and Risk Transmission Across Global Economies

Abstract

Financial market contagion can transmit economic and financial disturbances across countries through capital flows, investor sentiment, exchange rates, interest rates, and banking linkages. This study examines financial contagion and risk transmission across advanced, emerging, and developing economies using an integrated analytical framework based on the Financial Contagion Index (FCI), Risk Transmission Index (RTI), Market Stability Index (MSI), and Economic Stability Index (ESI). The results show clear differences in financial vulnerability across economic groups. Advanced economies recorded lower FCI and RTI values of 58 and 55, with higher MSI and ESI values of 82 and 80. Emerging economies recorded FCI of 72, RTI of 74, MSI of 68, and ESI of 65, indicating moderate vulnerability. Developing economies showed the highest vulnerability, with FCI of 84 and RTI of 86, while MSI and ESI declined to 51 and 48. The findings indicate that stronger financial institutions, market depth, liquidity, and regulatory capacity improve resilience to external shocks. The study highlights the importance of integrated risk monitoring, macroprudential policies, financial buffers, and international cooperation for reducing systemic financial vulnerability.