From Spot to Stress

Contagion is usually recognized too late. Stress begins in fragments: one sector weakens, short-horizon dependence tightens, option-implied fear rises, and only later does the broader market start to look systemically unstable. By the time that full picture becomes visible, most of the transmission has already occurred.

This article develops a high-dimensional multiscale framework to study that process in Brazilian equities. The model combines Airy wavelets, regularized canonical dependence, and Monte Carlo calibration to identify latent transmission channels across sectors and horizons. It also introduces an option-implied stress block designed to test whether derivatives begin to signal deterioration before spot-return networks fully reprice.

The purpose of the framework is not to produce another market-stress indicator. It is to detect the hidden structure of contagion more precisely: where stress begins, how it spreads, at which horizons it intensifies, and whether the options market starts speaking before the cash market finishes reacting.

In practical terms, the research sits at the intersection of financial econometrics, derivatives, and systemic risk. It is being developed as the first paper in a broader research program on multiscale transmission, option-implied stress, and the behavior of hedging structures under contagion regimes.