Econometric Measures of Connectedness and Systemic Risk in the Finance and Insurance Sectors
AbstractWe propose several econometric measures of connectedness based on principal-components analysis and Granger-causality networks, and apply them to the monthly returns of hedge funds, banks, broker/dealers, and insurance companies. We find that all four sectors have become highly interrelated over the past decade, likely increasing the level of systemic risk in the finance and insurance industries through a complex and time-varying network of relationships. These measures can also identify and quantify financial crisis periods, and seem to contain predictive power in out-of-sample tests. Our results show an asymmetry in the degree of connectedness among the four sectors, with banks playing a much more important role in transmitting shocks than other financial institutions.
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Bibliographic InfoPaper provided by Department of Economics, University of Venice "Ca' Foscari" in its series Working Papers with number 2011_21.
Date of creation: 2011
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Systemic Risk; Financial Institutions; Liquidity; Financial Crises;
Other versions of this item:
- Billio, Monica & Getmansky, Mila & Lo, Andrew W. & Pelizzon, Loriana, 2012. "Econometric measures of connectedness and systemic risk in the finance and insurance sectors," Journal of Financial Economics, Elsevier, vol. 104(3), pages 535-559.
- G12 - Financial Economics - - General Financial Markets - - - Asset Pricing
- G29 - Financial Economics - - Financial Institutions and Services - - - Other
- C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
This paper has been announced in the following NEP Reports:
- NEP-ALL-2011-12-13 (All new papers)
- NEP-BAN-2011-12-13 (Banking)
- NEP-IAS-2011-12-13 (Insurance Economics)
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