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

  • Diebold, Francis X.
  • Yılmaz, Kamil

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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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
DOI: 10.1016/j.jeconom.2014.04.012
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