What drives dynamic connectedness of the U.S equity sectors during different business cycles?

The study investigates (i) the time-varying and directional connectedness of nine equity sectors through intra- and inter-sector volatility spillover periods and (ii) assesses the impact of state variables on aggregate volatility spillovers. The study finds about 76% of volatility linkage is associated with cross-sector volatility transmissions. Aggressive sectors, which are sensitive to macroeconomic risk, play the net volatility transmission role. Defensive sectors that are largely immune to macroeconomic risk play the net volatility receiving role. The intensity and direction of volatility transmissions among the sectors vary with economic expansion and recession periods. Over time, some sectors switching from net transmitting to net receiving role and vice versa. Macro and financial market uncertainty variables significantly impact volatility spillover at lower volatility spillover (economic expansion period) and higher volatility (economic recession periods) volatility spillover quantiles. Political signals are seemingly more imprecise and uninformative during economic expansion or low quantiles, intensifying volatility spillover. Overall, the causal effects of macro, financial, and policy uncertainty variables on aggregate volatility spillover are asymmetric, nonlinear, and time-varying. The study's result supports the cross-hedging and financial contagion views of volatility transmission across nine US equity sectors.