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Proper measures of connectedness

Author

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  • Mario Maggi

    (Università di Pavia)

  • Maria-Laura Torrente

    (Università di Genova)

  • Pierpaolo Uberti

    (Università di Genova)

Abstract

The concept of connectedness has been widely used in financial applications, in particular for systemic risk detection. Despite its popularity, at the state of the art, a rigorous definition of connectedness is still missing. In this paper we propose a general definition of connectedness introducing the notion of proper measures of connectedness (PMCs). Based on the classical concept of mean introduced by Chisini, we define a family of PMCs and prove some useful properties. Further, we investigate whether the most popular measures of connectedness available in the literature are consistent with the proposed theoretical framework. We also compare different measures in terms of forecasting performances on real financial data. The empirical evidence shows the forecasting superiority of the PMCs compared to the measures that do not satisfy the theoretical properties. Moreover, the empirical results support the evidence that the PMCs can be useful to detect in advance financial bubbles, crises, and, in general, for systemic risk detection.

Suggested Citation

  • Mario Maggi & Maria-Laura Torrente & Pierpaolo Uberti, 2020. "Proper measures of connectedness," Annals of Finance, Springer, vol. 16(4), pages 547-571, December.
    • Handle: RePEc:kap:annfin:v:16:y:2020:i:4:d:10.1007_s10436-020-00363-3
    DOI: 10.1007/s10436-020-00363-3
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    Cited by:

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    More about this item

    Keywords

    Connectedness; Systemic risk; Market risk; Financial crisis;
    All these keywords.

    JEL classification:

    • C60 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - General
    • E30 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - General (includes Measurement and Data)
    • G01 - Financial Economics - - General - - - Financial Crises
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation

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