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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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File URL: http://www.sciencedirect.com/science/article/pii/S0304407614000712
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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
Contact details of provider: Web page: http://www.elsevier.com/locate/jeconom

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  1. Franklin Allen & Ana Babus & Elena Carletti, 2010. "Financial Connections and Systemic Risk," Economics Working Papers ECO2010/30, European University Institute.
  2. Diebold, Francis X. & Yilmaz, Kamil, 2012. "Better to give than to receive: Predictive directional measurement of volatility spillovers," International Journal of Forecasting, Elsevier, vol. 28(1), pages 57-66.
  3. White,Halbert, 1996. "Estimation, Inference and Specification Analysis," Cambridge Books, Cambridge University Press, number 9780521574464, December.
  4. Diebold, Francis X. & Yilmaz, Kamil, 2008. "Measuring financial asset return and volatilty spillovers, with application to global equity markets," CFS Working Paper Series 2008/26, Center for Financial Studies (CFS).
  5. Torben G. Andersen & Tim Bollerslev & Peter F. Christoffersen & Francis X. Diebold, 2012. "Financial Risk Measurement for Financial Risk Management," NBER Working Papers 18084, National Bureau of Economic Research, Inc.
  6. Allen, Franklin & Babus, Ana & Carletti, Elena, 2011. "Asset Commonality, Debt Maturity and Systemic Risk," CEPR Discussion Papers 8476, C.E.P.R. Discussion Papers.
  7. Morten L. Bech & Enghin Atalay, 2008. "The topology of the federal funds market," Staff Reports 354, Federal Reserve Bank of New York.
  8. 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.
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  10. Marcella Lucchetta & Gianni De Nicolo, 2012. "Systemic Real and Financial Risks; Measurement, Forecasting, and Stress Testing," IMF Working Papers 12/58, International Monetary Fund.
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