Banking index volatility and spillover effects in G7 and BRICS economies: a quantile connectedness approach

Purpose This study aims to investigate the dynamic spillover effects of banking indices returns across G7 and BRICS economies, focusing on the period of crisis events such as the COVID-19 pandemic and the Ukraine–Russia war. This paper provides significant policy implications for investors and portfolio managers. Design/methodology/approach This study uses a quantile connectivity approach to analyze spillover effects in banking index returns across G7 and BRICS countries, focusing on extreme market conditions. Using monthly banking indices and a time-varying parameter VAR (TVP-VAR) model, the study captures dynamic volatility spillovers among 12 stock markets, offering flexibility to analyze time-varying relationships. It explores the interconnectedness of G7 and BRICS banking indices, calculating correlations and tracing spillovers using the Diebold and Yilmaz (2012, 2014) framework. The analysis highlights how structural shocks within the network impact volatility, providing insights into spillover dynamics under different market conditions. Findings The analysis reveals a high degree of connectivity between G7 and BRICS banking systems, with total connectedness exceeding 80% during extreme market conditions, especially during crises such as the COVID-19 pandemic and the Ukraine–Russia war. G7 indices, particularly those of the USA and Germany, emerge as net transmitters of risk spillovers, while Japan, although part of the G7, acts as an exception with weaker spillover transmission. In contrast, BRICS banking indices, including those of Russia, India, China and South Africa, are found to be net receivers of spillovers, underscoring their vulnerability to global financial risks. In addition, the study shows that total connectedness is symmetric, with significant fluctuations based on event-driven volatility, particularly during crisis periods. Banking systems in France, the UK, Italy and Germany act as strong diversifiers, while Japan serves as a hedge asset due to its close connectivity to other banking systems, especially the USA. Brazil’s banking index is identified as a weak diversifier and safe haven, with limited protective capacity during crises. Overall, the study emphasizes the importance of understanding global spillover dynamics, offering valuable insights for managing risk and market volatility, especially in times of crisis. Originality/value This study stands out for its use of a quantile connectivity approach to analyze dynamic spillover effects in G7 and BRICS banking indices, focusing on extreme market conditions during crises like COVID-19 and the Ukraine–Russia war. Using a TVP-VAR model allows capturing time-varying relationships and directional spillovers, revealing G7 indices as net risk transmitters (except Japan) and BRICS indices as net receivers. The findings emphasize the vulnerability of emerging markets, the diversification potential of G7 banking systems and the symmetric, event-driven nature of total connectedness. These insights provide valuable implications for risk management and policymaking in volatile global markets.