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A Functional-Coefficient VAR Model for Dynamic Quantiles with Constructing Financial Network

Author

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  • Zongwu Cai

    (Department of Economics, The University of Kansas, Lawrence, KS 66045, USA)

  • Xiyuan Liu

    (Department of Economics, The University of Kansas, Lawrence, KS 66045, USA)

Abstract

The degree of interdependences among holdings of financial sectors and its varying patterns play important roles in forming systemic risks within a financial system. In this article, we propose a VAR model of conditional quantiles with functional coefficients to construct a novel class of dynamic network system, of which the interdependences among tail risks such as Value-at-Risk are allowed to vary with a variable of general economy. Methodologically, we develop an easy-to-implement two-stage procedure to estimate functionals in the dynamic network system by the local linear smoothing technique. We establish the consistency and the asymptotic normality of the proposed estimator under time series settings. The simulation studies are conducted to show that our new methods work fairly well. The potential of the proposed estimation procedures is demonstrated by an empirical study of constructing and estimating a new type of dynamic financial network.

Suggested Citation

  • Zongwu Cai & Xiyuan Liu, 2020. "A Functional-Coefficient VAR Model for Dynamic Quantiles with Constructing Financial Network," WORKING PAPERS SERIES IN THEORETICAL AND APPLIED ECONOMICS 202017, University of Kansas, Department of Economics, revised Oct 2020.
    • Handle: RePEc:kan:wpaper:202017
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    File URL: http://www2.ku.edu/~kuwpaper/2020Papers/202017.pdf
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    References listed on IDEAS

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    Cited by:

    1. Zongwu Cai & Xiyuan Liu, 2021. "Solving the Price Puzzle Via A Functional Coefficient Factor-Augmented VAR Model," WORKING PAPERS SERIES IN THEORETICAL AND APPLIED ECONOMICS 202106, University of Kansas, Department of Economics, revised Jan 2021.

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    More about this item

    Keywords

    Dynamic financial network; Functional coefficient models; Multivariate conditional quantile models; Nonparametric estimation; VAR modeling;
    All these keywords.

    JEL classification:

    • C14 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Semiparametric and Nonparametric Methods: General
    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics
    • C45 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics - - - Neural Networks and Related Topics
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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