Reprint of: On the network topology of variance decompositions: Measuring the connectedness of financial firms

Francis Diebold and Kamil Yilmaz ()

Journal of Econometrics, 2023, vol. 234, issue S, 70-90

Abstract: We propose several connectedness measures built from pieces of variance decompositions, and we argue that they provide natural and insightful measures of connectedness. We also show that variance decompositions define weighted, directed networks, so that our connectedness measures are intimately related to key measures of connectedness used in the network literature. Building on these insights, we track daily time-varying connectedness of major U.S. financial institutions’ stock return volatilities in recent years, with emphasis on the financial crisis of 2007–2008.

Keywords: Risk measurement; Risk management; Portfolio allocation; Market risk; Credit risk; Systemic risk; Asset markets; Degree distribution (search for similar items in EconPapers)
JEL-codes: C3 G2 (search for similar items in EconPapers)
Date: 2023
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Persistent link: https://EconPapers.repec.org/RePEc:eee:econom:v:234:y:2023:i:s:p:70-90

DOI: 10.1016/j.jeconom.2023.03.003

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