Faculty of Economics and Business Administration Publications Database

Econometric measures of connectedness and systemic risk in the finance and insurance sectors

Selected
Authors:
Billio, Monica
Getmansky, Mila
Lo, Andrew W.
Source:
Volume: 104
Number: 3
Pages: 535 - 559
Month: June
ISSN-Print: 0304-405X
Link External Source: Online Version
Year: 2012
Keywords: Systemic risk; Financial institutions; Liquidity; Financial crises
Abstract:

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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