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Econometric Measures of Connectedness and Systemic Risk in the Finance and Insurance Sectors

  • Monica Billio

    ()

    (Department of Economics, University Ca’ Foscari of Venice)

  • Mila Getmansky

    (Isenberg School of Management, University of Massachusetts)

  • Andrew W. Lo

    (MIT Sloan School of Management)

  • Loriana Pelizzon

    (Department of Economics, University Ca’ Foscari of Venice)

We propose several econometric measures of connectedness based on principal-components analysis and Granger-causality networks, and apply them to the monthly returns of hedge funds, banks, broker/dealers, and insurance companies. We find that all four sectors have become highly interrelated over the past decade, likely increasing the level of systemic risk in the finance and insurance industries through a complex and time-varying network of relationships. These measures can also identify and quantify financial crisis periods, and seem to contain predictive power in out-of-sample tests. Our results show an asymmetry in the degree of connectedness among the four sectors, with banks playing a much more important role in transmitting shocks than other financial institutions.

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Paper provided by Department of Economics, University of Venice "Ca' Foscari" in its series Working Papers with number 2011_21.

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Length: 55
Date of creation: 2011
Date of revision:
Handle: RePEc:ven:wpaper:2011_21
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