Model-free and model-based connectedness in highly, medium and lowly correlated financial returns: analyses of OECD inflations

Abstract

This paper deals with the analysis of inflation in financial returns by using model-free connectedness framework which includes investigating persistence in the series and data from 22 countries from April 1958 to November 2023 which are grouped into highly, medium and lowly correlated returns. The results indicate that 10 countries, among the members of G12 are listed among highly-medium correlated inflation returns. The G7 countries are listed with high-medium inflation returns, of which France, Germany, Italy, and the USA are net shock transmitters, while Canada, Japan and the UK are net shock receivers. Total connectedness indices are positively related to the correlations, and the connectedness is found to increase astronomically towards late 2020 due to economic and financial market integration. Global financial crisis such as that of 2007–2009 and the COVID-19 pandemic have reset the integration of economic variables again. A policy recommendation is therefore given at the end.