Dynamic distances between stock markets: use of uncertainty indices measures

Abstract

In this study we consider how to more accurately identify the possible impact of systemic risk on spatial dependence related to the most significant financial crises over the last 17 years: the Lehman Brothers bankruptcy, the sub-prime mortgage crisis, the European debt crisis, Brexit and the COVID-19 pandemic which has also affected the financial markets. We analyse two new dynamic distances applied to stock markets based on exogenous criteria known as the World Uncertainty Index (WUI) and our proposed Google Trends Uncertainty Index (GTUI). We address the feasibility and benefits of these dynamic distances compared to an alternative criterion based on hours. Using the new proposed dynamic distance to obtain the Moran’s I statistic, we analyse the spatial dependence between the losses of 46 stock markets.