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Dynamic structure of the US financial systems

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Author Info

  • Khaldoun Khashanah
  • Linyan Miao
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    Abstract

    Purpose – This paper empirically investigates the structural evolution of the US financial systems. It particularly aims to explore if the structure of the financial systems changes when the economy enters a recession. Design/methodology/approach – The empirical analysis is conducted through the statistical approach of principal components analysis (PCA) and the graph theoretic approach of minimum spanning trees (MSTs). Findings – The PCA results suggest that the VIX was the dominant factor influencing the financial system prior to the recession; however, the monetary policy represented by the three-month T-bill yield became the leading factor in the system during the recession. By analyzing the MSTs, we find evidence that the structure of the financial system during the economic recession is substantially different from that during the period of economic expansion. Moreover, we discover that the financial markets are more integrated during the economic recession. The much stronger integration of the financial system was found to start right before the advent of the recession. Practical implications – Research findings will help individuals, institutions, regulators, central bankers better understand the market structure under the economic turmoil, so more efficient strategies can be used to minimize the systemic risk. Originality/value – This study compares the structure of the US financial markets in economic expansion and contraction periods. The structural dynamics of the financial system are explored, focusing on the recent economic recession triggered by the US subprime mortgage crisis. We introduce a new systemic risk measure.

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    File URL: http://www.emeraldinsight.com/journals.htm?issn=1086-7376&volume=28&issue=4&articleid=1954279&show=abstract
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    Bibliographic Info

    Article provided by Emerald Group Publishing in its journal Studies in Economics and Finance.

    Volume (Year): 28 (2011)
    Issue (Month): 4 (October)
    Pages: 321-339

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    Handle: RePEc:eme:sefpps:v:28:y:2011:i:4:p:321-339

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    Web page: http://www.emeraldinsight.com

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    Postal: Emerald Group Publishing, Howard House, Wagon Lane, Bingley, BD16 1WA, UK
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    Related research

    Keywords: Financial systems; Minimum spanning tree; Principal components analysis; Recession; System of systems; United States of America;

    References

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    Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
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    1. Naylor, Michael J. & Rose, Lawrence C. & Moyle, Brendan J., 2007. "Topology of foreign exchange markets using hierarchical structure methods," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 382(1), pages 199-208.
    2. Gilmore, Claire G. & Lucey, Brian M. & Boscia, Marian, 2008. "An ever-closer union? Examining the evolution of linkages of European equity markets via minimum spanning trees," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 387(25), pages 6319-6329.
    3. Coelho, Ricardo & Gilmore, Claire G. & Lucey, Brian & Richmond, Peter & Hutzler, Stefan, 2007. "The evolution of interdependence in world equity markets—Evidence from minimum spanning trees," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 376(C), pages 455-466.
    4. Martin D. D. Evans (Georgetown University) and Viktoria Hnatkovska (Georgetown University), 2005. "International Capital Flows, Returns and World Financial Integration," Working Papers gueconwpa~05-05-17, Georgetown University, Department of Economics.
    5. Giovanni Bonanno & Nicolas Vandewalle & Rosario N. Mantegna, 2000. "Taxonomy of Stock Market Indices," Papers cond-mat/0001268, arXiv.org, revised Aug 2000.
    6. Giovanni Bonanno & Fabrizio Lillo & Rosario N. Mantegna, 2000. "High-frequency Cross-correlation in a Set of Stocks," Papers cond-mat/0009350, arXiv.org, revised Nov 2000.
    7. Fama, Eugene F, 1970. "Efficient Capital Markets: A Review of Theory and Empirical Work," Journal of Finance, American Finance Association, vol. 25(2), pages 383-417, May.
    8. Prasanna Gai & Nigel Jenkinson & Sujit Kapadia, 2007. "Systemic risk in modern financial systems: analytics and policy design," Journal of Risk Finance, Emerald Group Publishing, vol. 8(2), pages 156-165, March.
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