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Measuring the frequency dynamics of financial connectedness and systemic risk

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  • Jozef Barunik
  • Tomas Krehlik

Abstract

We propose a new framework for measuring connectedness among financial variables that arises due to heterogeneous frequency responses to shocks. To estimate connectedness in short-, medium-, and long-term financial cycles, we introduce a framework based on the spectral representation of variance decompositions. In an empirical application, we document the rich time-frequency dynamics of volatility connectedness in US financial institutions. Economically, periods in which connectedness is created at high frequencies are periods when stock markets seem to process information rapidly and calmly, and a shock to one asset in the system will have an impact mainly in the short term. When the connectedness is created at lower frequencies, it suggests that shocks are persistent and are being transmitted for longer periods.

Suggested Citation

  • Jozef Barunik & Tomas Krehlik, 2015. "Measuring the frequency dynamics of financial connectedness and systemic risk," Papers 1507.01729, arXiv.org, revised Dec 2017.
  • Handle: RePEc:arx:papers:1507.01729
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    References listed on IDEAS

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    Cited by:

    1. Křehlík, Tomáš & Baruník, Jozef, 2017. "Cyclical properties of supply-side and demand-side shocks in oil-based commodity markets," Energy Economics, Elsevier, vol. 65(C), pages 208-218.
    2. Aviral Kumar Tiwari & Juncal Cunado & Rangan Gupta & Mark E. Wohar, 2017. "Volatility Spillovers across Global Asset Classes: Evidence from Time and Frequency Domains," Working Papers 201780, University of Pretoria, Department of Economics.
    3. Antonakakis, Nikolaos & Chatziantoniou, Ioannis & Filis, George, 2017. "Oil shocks and stock markets: Dynamic connectedness under the prism of recent geopolitical and economic unrest," International Review of Financial Analysis, Elsevier, vol. 50(C), pages 1-26.

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