We propose a market-based framework that exploits time-varying parameter vector autoregressions to estimate the dynamic network of financial spillover effects. We apply it to financials in the ...Standard & Poor’s 500 index and estimate interconnectedness at the sectoral and institutional levels. At the sectoral level, we uncover two main events in terms of interconnectedness: the Long-Term Capital Management crisis and the 2008 financial crisis. After these crisis events, we find a gradual decrease in interconnectedness, not observable using the classical rolling-window approach. At the institutional level, our framework delivers more stable interconnectedness rankings than other comparable market-based measures.
•We examine the impact of economic policy uncertainty on risk spillovers within the Euro-zone.•We adapt the method developed by Adrian and Brunnermeier (forthcoming) to measure sovereign bond's risk ...spillovers.•We use a panel data model with economic policy uncertainty indices proposed by Baker et al. (2013) as regressors.•Economic policy uncertainty has an impact on country-level risk spillovers.•The impact of economic policy uncertainty on risk spillover is stronger for “leading” countries such as Germany.
This paper focuses on the impact of economic policy uncertainty on risk spillovers within the Eurozone and contributes to these two growing literatures. To this end, we adapt the two-step procedure developed by Adrian and Brunnermeier (forthcoming) in the framework of financial systemic risk to the sovereign bond market. Accordingly, we attempt (i) to measure the extent to which distress affecting one given country's sovereign spreads can affect the Eurozone's bond market as a whole and then (ii) to identify the determinants of risk spillovers by estimating a panel data model with macroeconomic state variables and economic policy uncertainty (EPU) indices introduced by Baker et al. (2013) as regressors. EPU indices considered concern the four largest Eurozone countries, i.e. Germany, France, Italy and Spain, as well as the United States. The model is estimated with quarterly data for ten countries representing the bulk of debt issuances within the Eurozone over a period ranging from Q4/2008 to Q2/2013, which is characterized by historically high dispersion of sovereign bond spreads either across time or across countries. Our results support the idea that economic policy uncertainty in the core economies of the Eurozone, i.e. Germany and France, as well as in the largest periphery countries, i.e. Italy and Spain, can create an environment likely to exacerbate the transmission of risk arising from abnormal developments of individual countries' sovereign spreads to the Eurozone bond market as a whole. In this respect, our results plead for larger effort of Eurozone “leaders” to reduce the uncertainty surrounding their economic policy in periods of crisis not only to avoid adverse effects on their own economies but also to reduce the risk of a destabilization of the Eurozone sovereign bond market as a whole.
The aim of this paper is to contribute to the debate on systemic risk by assessing the extent to which distress within the main different financial sectors, namely, the banking, insurance and other ...financial services industries contribute to systemic risk. To this end, we rely on the ΔCoVaR systemic risk measure introduced by Adrian and Brunnermeier (2011). In order to provide a formal ranking of the financial sectors with respect to their contribution to systemic risk, the original ΔCoVaR approach is extended here to include the Kolmogorov–Smirnov test developed by Abadie (2002), based on bootstrapping. Our empirical results reveal that in the Eurozone, for the period ranging from 2004 to 2012, the other financial services sector contributes relatively the most to systemic risk at times of distress affecting this sector. In turn, the banking sector appears to contribute more to systemic risk than the insurance sector. By contrast, the insurance industry is the systemically riskiest financial sector in the United States for the same period, while the banking sector contributes the least to systemic risk in this area. Beyond this ranking, the three financial sectors of interest are found to contribute significantly to systemic risk, both in the Eurozone and in the United States.
In this paper, we aim at explaining a specific type of heterogeneity in the euro area pertaining to the diverging responses of countries and sectors to the European Central Bank's Unconventional ...Monetary Policy. Equipped with stock markets indices of 17 sectors for each euro area country, we first preform an event-study analysis to assess the reaction of the markets. Next, we regress the responses on a set of country-specific drivers. Our main findings show that variables related to the nature of banking industry (e.g. cost-to-income, return on assets), macroeconomic environment (e.g. gross debt) and macroprudential policy all contribute to observe diverging responses to ECB's monetary policies. While some sectors and countries responded more negatively than positively to the policies, the Unconventional Monetary Policy impacts the markets positively on average. A policy implication is that the heterogeneous response calls for domestic structural reforms that should target the discrepancies in the banking and the macroeconomic environments across euro area countries.
We contribute to the literature on international risk spillovers by developing a unified framework based on spatial econometrics that enables us to address the following questions: (i) what are the ...effective transmission channels – real linkages and informational channels – of international risk spillovers across countries and/or regions, (ii) what are the most dominant ones, and (iii) which countries are most at risk for their environment and which are suffering the most from international exposure. Our analysis, based on 41 advanced and emerging economies from 2008Q1 to 2012Q4, shows that among the considered channels for explaining international spillovers of sovereign bond spreads, the informational channel is of utmost importance. Our results challenge previous findings from the literature in which the empirical strategy did not accommodate altogether important features of country spillovers, such as the co-existence of multiple transmission channels in the presence of contemporaneous and time-lagged interactions. Ultimately, our stress-testing analysis reveals important insights on countries prone either to international spillovers, international exposure or both at the regional and the worldwide level.
•Identification of country-level determinants of sovereign wealth funds net inflows.•Use of a large database of 43 recipient countries over the period 2004–2009.•Show presence of spatial competition ...between countries to attract SWF’s investments.•Inverse Hyperbolic Sine (IHS) transformation of the outcome (net inflows of capital).•Develop a spatial panel models to accommodate the IHS transformation of the outcome.
The aim of this paper is to identify the driving forces of cross-border investments emanating from Sovereign wealth funds and to test the existence of spatial competition among recipient countries. For this, we develop an original econometric framework that quantifies the role of spatial dependence in the location of investments, and that uses a modified version of the standard estimation procedure of spatial panel model, which accommodates the Inverse Hyperbolic Sine transformation of the dependent variable. This transformation copes with two critical features of net capital flows, namely an highly skewed distribution and the presence of zero and negative values. Using a large-scale database, we provide evidence of negative spatial dependence, investments in one country being on average at the expense of its neighbors.
Abstract
In the aftermath of the financial crisis of 2007–2009, the growing body of literature on financial networks has widely documented the predictive power of topological characteristics (e.g., ...degree centrality measures) to explain the systemic impact or systemic exposure of financial institutions. This study shows that considering alternative topological measures based on local sub-network environment improves our ability to identify systemic institutions. To provide empirical evidence, we apply a two-step procedure. First, we recover network communities (i.e., close-peer environment) on a spillover network of financial institutions. Second, we regress alternative measures of vulnerability (i.e. firm’s losses)on three levels of topological measures: the global level (i.e., firm topological characteristics computed over the whole system), local level (i.e., firm topological characteristics computed over the community to which it belongs), and aggregated level by averaging individual characteristics over the community. The sample includes 46 financial institutions (banks, broker-dealers, and insurance and real-estate companies) listed in the Standard & Poor’s 500 index. Our results confirm the informational content of topological metrics based on a close-peer environment. Such information is different from that embedded in traditional system-wide topological metrics and can help predict distress of financial institutions in times of crisis.
For a sample of 356 LSE stocks from the period 2013–2019, we find that common short sold capital is positively and significantly associated with one-month ahead four-factor residual return ...correlation, controlling for many pair characteristics, including similarities in size, book-to-market, and momentum. The relation weakens with stock illiquidity, whereas it strengthens when short positions originate from informed agents, such as hedge funds, active investors, and short sellers with high past performance. This supports our hypothesis that the relation is driven by information, not price pressure. We show that these results can be used to obtain diversification benefits.
•We use new data on short positions disclosed to the Financial Conduct Authority to construct a measure of common short selling.•The measure is intuitive and captures the strategies of short sellers taking net negative positions against many stocks.•For our sample, we find that common short selling is positively and significantly related with future excess comovement.•We explore two hypotheses that could drive this relationship: price pressure and the informative trading.•We show that these results can be used to obtain diversification benefits.
Drawing on recent contributions inferring financial interconnectedness from market data, our paper provides new insights on the evolution of the US financial industry over a long period of time by ...using several tools coming from network science. Relying on a Time-Varying Parameter Vector AutoRegressive (TVP-VAR) approach on stock market returns to retrieve unobserved directed links among financial institutions, we reconstruct a fully dynamic network in the sense that connections are let to evolve through time. The financial system analysed consists of a large set of 155 financial institutions that are all the banks, broker-dealers, insurance and real estate companies listed in the Standard & Poors' 500 index over the 1993-2014 period. Looking alternatively at the individual, then sector-, community- and system-wide levels, we show that network sciences' tools are able to support well-known features of the financial markets such as the dramatic fall of connectivity following Lehman Brothers' collapse. More importantly, by means of less traditional metrics, such as sectoral interface or measurements based on contagion processes, our results document the co-existence of both fragmentation and integration phases between firms independently from the sectors they belong to, and doing so, question the relevance of existing macroprudential surveillance frameworks which have been mostly developed on a sectoral basis. Overall, our results improve our understanding of the US financial landscape and may have important implications for risk monitoring as well as macroprudential policy design.
Celotno besedilo
Dostopno za:
DOBA, IZUM, KILJ, NUK, PILJ, PNG, SAZU, SIK, UILJ, UKNU, UL, UM, UPUK
We contribute to the empirical literature on the risk-management approach to monetary policy by estimating regime switching models where the strength of the response of monetary policy to ...macroeconomic conditions depends on the level of risk associated with the inflation outlook and risk in financial markets. Using quarterly data for the Greenspan period we find that: (i) risk in the inflation outlook and in financial markets are a more powerful driver of monetary policy regime changes than variables typically suggested in the literature, such as the level of inflation and the output gap; (ii) estimation of regime switching models shows that the response of the US Fed to the inflation outlook is invariant across policy regimes; (iii) however, in periods of high economic risk monetary policy tends to respond more aggressively to the output gap and the degree of inertia tends to be lower than in normal circumstances; and (iv) the US Fed is estimated to have responded aggressively to the output gap in the late 1980s and beginning of the 1990s, and in the late 1990s and early 2000s. These results are consistent with Mishkin (2008)’s view that in periods of high economic risk monetary authorities should respond aggressively to changes in macroeconomic conditions while the degree of inertia should be lower than in normal circumstances.
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