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On the Network Topology of Variance Decompositions: Measuring the Connectedness of Financial Firms

  • Francis X. Diebold

    ()

    (Department of Economics, University of Pennsylvania)

  • Kamil Yılmaz

    ()

    (Department of Economics, Koç University)

We propose several connectedness measures built from pieces of variance decompositions, and we argue that they provide natural and insightful measures of connectedness among financial asset returns and volatilities. 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 both average and daily time-varying connectedness of major U.S. financial institutions' stock return volatilities in recent years, including during the financial crisis of 2007-2008.

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File URL: http://economics.sas.upenn.edu/system/files/11-031.pdf
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Paper provided by Penn Institute for Economic Research, Department of Economics, University of Pennsylvania in its series PIER Working Paper Archive with number 11-031.

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Length: 36 pages
Date of creation: 30 Sep 2011
Date of revision:
Handle: RePEc:pen:papers:11-031
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  2. Nikolaus Hautsch & Julia Schaumburg & Melanie Schienle, 2012. "Financial Network Systemic Risk Contributions," SFB 649 Discussion Papers SFB649DP2012-053, Sonderforschungsbereich 649, Humboldt University, Berlin, Germany.
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  7. 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).
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  9. Bech, Morten L. & Atalay, Enghin, 2008. "The topology of the federal funds market," Working Paper Series 0986, European Central Bank.
  10. Monica Billio & Mila Getmansky & Andrew W. Lo & Loriana Pelizzon, 2011. "Econometric Measures of Connectedness and Systemic Risk in the Finance and Insurance Sectors," Working Papers 2011_21, Department of Economics, University of Venice "Ca' Foscari".
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  17. Francis X. Diebold & Kamil Yilmaz, 2010. "Better to Give than to Receive: Predictive Directional Measurement of Volatility Spillovers," Koç University-TUSIAD Economic Research Forum Working Papers 1001, Koc University-TUSIAD Economic Research Forum, revised Mar 2010.
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  23. Viral V. Acharya, 2010. "Measuring systemic risk," Proceedings 1140, Federal Reserve Bank of Chicago.
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