A structural approach to identify financial transmission in distinguished scenarios of crises

Helmut Herwartz and Jan Roestel

No 2018-08, Economics Working Papers from Christian-Albrechts-University of Kiel, Department of Economics

Abstract: This paper investigates the propagation of instability through key asset markets of the US financial system - equity, real estate, banking and treasury - between 1/3/2000 and 12/26/2014. For this purpose, we develop an identification method to uncover characteristic financial market interrelations under distinguished scenarios of crises. It refers to the logic behind narrative sign restrictions and allows to extract time varying contemporaneous effects and volatility transmission from conventional reduced form volatility models with dynamic correlations. We find the market value of banking institutions to be highly sensitive to news originating in other markets, with those originating in the real estate market being most important. Under stress, in turn, the banking sector tends to dominate financial market (co)variation, where it exhibits a marked feedback relation with both the real estate and the equity market.

Keywords: Identification; Contemporaneous effects; Causality; Impulse response analysis; GARCH; Volatility transmission; Financial crises (search for similar items in EconPapers)
JEL-codes: C32 C39 E44 G01 (search for similar items in EconPapers)
Date: 2018
New Economics Papers: this item is included in nep-ban, nep-ets and nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:zbw:cauewp:201808

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