Community-level contagion among diverse financial assets

As global financial markets become increasingly interconnected, financial contagion has developed into a major influencer of asset price dynamics. Motivated by this context, our study explores financial contagion both within and between asset communities. We contribute to the literature by examining the contagion phenomenon at the community level rather than among individual assets. Our experiments rely on high-frequency data comprising cryptocurrencies, stocks and US ETFs over the 4-year period from April 2019 to May 2023. Using the Louvain community detection algorithm, Vector Autoregression contagion detection model and Tracy–Widom random matrix theory for noise removal from financial assets, we present three main findings. Firstly, while the magnitude of contagion remains relatively stable over time, contagion density (the percentage of asset pairs exhibiting contagion within a financial system) increases. This suggests that market uncertainty is better characterized by the transmission of shocks more broadly than by the strength of any single spillover. Secondly, there is no significant difference between intra- and inter-community contagion, indicating that contagion is a system-wide phenomenon rather than being confined to specific asset groups. Lastly, certain communities themselves, especially those dominated by Information Technology assets, tend to act as major contagion transmitters in the financial network over the examined period, spreading shocks with high densities to many other communities. Our findings suggest that traditional risk management strategies such as portfolio diversification through investing in low-correlated assets or different types of investment vehicle might be insufficient due to widespread contagion. • A community-level contagion among stocks, US ETFs and cryptocurrencies is examined. • Contagion is investigated across different time periods and market conditions. • Contagion density increases during market uncertainty while magnitude stays steady. • No significant difference between intra-community and inter-community contagion. • Information Technology communities tend to act as dominant contagion transmitters.