Decoding Market Linkages and Risk Transmission: A Dynamic Analysis of G7 Stock Indices and Currency Pairs Against a Changing Economic Landscape

Growing financialization, technological advancement and the dynamic nature of financial instruments have not only assisted in generating risk diversification opportunities but have also made financial markets susceptible to economic shocks and crises. In this context, the present study attempts to explore the dynamic risk transmission and interconnectedness of G7 stock indices and major currency pairs (JPY/USD and CHF/USD) from 2020 to 2024. The quantile and time-frequency analysis indicate notable global financial linkages, with the SP500 acting as a dominant net transmitter of risk, particularly influencing North American and European markets. Key European indices such as DAX 40 and CAC 40 also demonstrate substantial regional risk spillovers, while the Nikkei and major exchange rates primarily act as net receivers, absorbing shocks during periods of market stress. The study highlights the changing landscape of market connectedness, with peaks observed during the COVID-19 pandemic and a gradual return to stability thereafter. These findings provide useful insights into the dynamics of global risk transmission, highlighting the necessity for robust risk management strategies aimed at mitigating market volatility.