Systemic Risk and Contagion in Global Equity Markets: An Applied Economic Analysis of Emerging Market Cascades
This study extends the Gai-Kapadia framework, originally developed for interbank contagion, to assess systemic risk and default cascades in global equity markets. We analyse a network of assets comprising Brazilian and developed-market equities over the period 2015-2026, constructing exposure-based financial networks from asset return co-movements. Threshold filtering is applied to identify significant interconnections. Cascade dynamics are examined through a combination of deterministic propagation and stochastic Monte Carlo simulations (n = 1,000) under varying shock intensities. The results indicate a high degree of global resilience, with a negligible probability of large-scale failure, while preserving localised vulnerability within highly clustered subnetworks. Single shocks generate, on average, one failed asset, whereas simultaneous shocks lead to an average of two failed assets, suggesting limited contagion below a critical threshold.
Network analysis reveals a pronounced structural asymmetry between emerging and developed markets. Brazilian assets exhibit high clustering coefficients and dense connectivity, amplifying local shock propagation, whereas developed-market assets display lower clustering and weaker connectivity, limiting the spread of contagion. Tail-risk analysis based on empirical CCDFs and Hill estimators confirms the presence of heavy-tailed loss distributions, particularly among emerging-market assets, indicating greater exposure to extreme events.
The findings demonstrate that systemic risk arises from the interaction between network topology and tail-risk behaviour rather than from isolated asset characteristics. The proposed framework provides a scalable and empirically grounded approach to systemic risk assessment and stress testing, offering practical insights for regulators, policymakers, and portfolio managers operating in increasingly interconnected financial markets.
Copyright© 2026 The Author(s). This article is distributed under the terms of the license CC-BY 4.0., which permits any further distribution in any medium, provided the original work is properly cited.
Article’s History: Received 30th of March, 2026; Revised 4th of May, 2026; Accepted 10th of June, 2026; Available online: 30th of June, 2026. Published as research article in the Volume XXI, Summer, Issue 3(93), 2026.
Castillo Pereda, A.I. (2026). Systemic Risk and Contagion in Global Equity Markets: An Applied Economic Analysis of Emerging Market Cascades. Journal of Applied Economic Sciences, Volume XXI, Summer, 3(93), 809 – 835. https://doi.org/10.57017/jaes.v21.3(93).07
Acknowledgments/Funding: The author would like to thank colleagues and researchers whose discussions and insights contributed to the development of this work. No specific funding was received for this research.
Conflict of Interest Statement: The author declares that the research was conducted in the absence of any commercial or financial relationships that could be construed as a potential conflict of interest.
Data Availability Statement: The data that support the findings of this study were obtained from Yahoo Finance and are publicly available at https://finance.yahoo.com.
Ethical Approval Statement: This study is theoretical and computational in nature and did not involve human participants, personal data, or animal subjects. Therefore, ethical approval was not required.
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