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On the network topology of variance decompositions: Measuring the connectedness of financial firms

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  • Diebold, Francis X.
  • Yılmaz, Kamil

Abstract

We propose several connectedness measures built from pieces of variance decompositions, and we argue that they provide natural and insightful measures of connectedness. We also show that variance decompositions define weighted, directed networks, so that our connectedness measures are intimately related to key measures of connectedness used in the network literature. Building on these insights, we track daily time-varying connectedness of major US financial institutions’ stock return volatilities in recent years, with emphasis on the financial crisis of 2007–2008.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Econometrics.

Volume (Year): 182 (2014)
Issue (Month): 1 ()
Pages: 119-134

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Handle: RePEc:eee:econom:v:182:y:2014:i:1:p:119-134

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Web page: http://www.elsevier.com/locate/jeconom

Related research

Keywords: Risk measurement; Risk management; Portfolio allocation; Market risk; Credit risk; Systemic risk; Asset markets; Degree distribution;

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  1. Franklin Allen & Ana Babus & Elena Carletti, 2010. "Financial Connections and Systemic Risk," Economics Working Papers ECO2010/26, European University Institute.
  2. Jean-Marie Dufour & Abderrahim Taamouti, 2008. "Short and long run causality measures: theory and inference," Economics Working Papers we083720, Universidad Carlos III, Departamento de Economía.
  3. Wolfgang Karl Härdle & Ostap Okhrin & Yarema Okhrin, 2010. "Time varying Hierarchical Archimedean Copulae," SFB 649 Discussion Papers SFB649DP2010-018, Sonderforschungsbereich 649, Humboldt University, Berlin, Germany.
  4. Bech, Morten L. & Atalay, Enghin, 2008. "The topology of the federal funds market," Working Paper Series 0986, European Central Bank.
  5. Francis X. Diebold & Kamil Yilmaz, 2008. "Measuring financial asset return and volatility spillovers, with application to global equity markets," Working Papers 08-16, Federal Reserve Bank of Philadelphia.
  6. Marcella Lucchetta & Gianni De Nicoló, 2012. "Systemic Real and Financial Risks," IMF Working Papers 12/58, International Monetary Fund.
  7. Koop, Gary & Pesaran, M. Hashem & Potter, Simon M., 1996. "Impulse response analysis in nonlinear multivariate models," Journal of Econometrics, Elsevier, vol. 74(1), pages 119-147, September.
  8. Daron Acemoglu & Asuman Ozdaglar & Alireza Tahbaz-Salehi, 2010. "Cascades in Networks and Aggregate Volatility," NBER Working Papers 16516, National Bureau of Economic Research, Inc.
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