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Spillover effects among financial institutions: A state-dependent sensitivity value-at-risk approach

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Listed:
  • Adams, Zeno
  • Füss, Roland
  • Gropp, Reint

Abstract

In this paper, we develop a state-dependent sensitivity value-at-risk (SDSVaR) approach that enables us to quantify the direction, size, and duration of risk spillovers among financial institutions as a function of the state of financial markets (tranquil, normal, and volatile). Within a system of quantile regressions for four sets of major financial institutions (commercial banks, investment banks, hedge funds, and insurance companies) we show that while small during normal times, equivalent shocks lead to considerable spillover effects in volatile market periods. Commercial banks and, especially, hedge funds appear to play a major role in the transmission of shocks to other financial institutions. Using daily data, we can trace out the spillover effects over time in a set of impulse response functions and find that they reach their peak after 10 to 15 days.

Suggested Citation

  • Adams, Zeno & Füss, Roland & Gropp, Reint, 2013. "Spillover effects among financial institutions: A state-dependent sensitivity value-at-risk approach," SAFE Working Paper Series 20, Research Center SAFE - Sustainable Architecture for Finance in Europe, Goethe University Frankfurt.
  • Handle: RePEc:zbw:safewp:20
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    References listed on IDEAS

    as
    1. King, Michael R. & Maier, Philipp, 2009. "Hedge funds and financial stability: Regulating prime brokers will mitigate systemic risks," Journal of Financial Stability, Elsevier, vol. 5(3), pages 283-297, September.
    2. repec:hrv:faseco:33077921 is not listed on IDEAS
    3. Lorenzo Cappiello & Bruno Gérard & Arjan Kadareja & Simone Manganelli, 2014. "Measuring Comovements by Regression Quantiles," Journal of Financial Econometrics, Society for Financial Econometrics, vol. 12(4), pages 645-678.
    4. Reint Gropp & Marco Lo Duca & Jukka Vesala, 2009. "Cross-Border Bank Contagion in Europe," International Journal of Central Banking, International Journal of Central Banking, vol. 5(1), pages 97-139, March.
    5. Koenker,Roger, 2005. "Quantile Regression," Cambridge Books, Cambridge University Press, number 9780521845731, April.
    6. Hott, Christian, 2009. "Herding behavior in asset markets," Journal of Financial Stability, Elsevier, vol. 5(1), pages 35-56, January.
    7. Danielsson, Jon & Taylor, Ashley & Zigrand, Jean-Pierre, 2004. "Highwaymen or heroes: should hedge funds be regulated?," LSE Research Online Documents on Economics 24782, London School of Economics and Political Science, LSE Library.
    8. Klaus, Benjamin & Rzepkowski, Bronka, 2009. "Risk spillover among hedge funds: The role of redemptions and fund failures," Working Paper Series 1112, European Central Bank.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    Risk spillovers; state-dependent sensitivity value-at-risk (SDSVaR); quantile regression; financial institutions; hedge funds;

    JEL classification:

    • G01 - Financial Economics - - General - - - Financial Crises
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage

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