Stock Market Interconnection and Contagion During the COVID-19 Pandemic: A Network Perspective

Abstract This paper investigates global equity market interdependence and contagion during the COVID-19 pandemic using a high-dimensional vector autoregressive (VAR) framework with LASSO regularization. We estimate dynamic structural interconnections among 19 G20 markets by applying a rolling-window sparse VAR model to equity returns purged of global factors. Connectedness is then quantified using generalized forecast error variance decomposition. To detect excess co-movement beyond structural transmission, we conduct residual-based contagion tests comparing pre- and post-pandemic dependence across multiple co-moment channels, including correlation, co-skewness, co-kurtosis, and co-volatility. The results reveal a sharp increase in market interdependence during early 2020, with advanced economies such as the US becoming key sources of return spillovers. Contagion tests uncover significant rises in higher-order dependencies – particularly in asymmetric and tail-related metrics – indicating not only a rise in the intensity of market co-movements, but also a transformation in their structure. These findings highlight the importance of disentangling structural linkages from crisis-induced contagion to better understand systemic risk in global equity markets.