This study investigates the dynamic connectedness across the variance risk premium in international developed and emerging equity markets based on a Bayesian time-varying parameter vector autoregressive methodology. The empirical results indicate that the total spillover index is on average 65.6%, indicating a high, albeit declining, level of interconnectedness across the investor sentiment in the three markets under review until early 2020. Following the COVID-19 outbreak though, the total investors' risk aversion connectedness - as expected - strengthens, but more importantly, its dynamics alter, indicating that the risk aversion of emerging markets is an important contributor to the connectedness of international markets.
Keywords: Behavioral economics; Covid; Diebold and Yilmaz; Econometrics; Emerging markets; Financial crisis; Financial market; International finance; Risk aversion; Spillovers; TVP-VAR; Variance risk premium.
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