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

Monica Billio, Mila Getmansky, Andrew Lo () and Loriana Pelizzon ()

Journal of Financial Economics, 2012, vol. 104, issue 3, 535-559

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.

Keywords: Systemic risk; Financial institutions; Liquidity; Financial crises (search for similar items in EconPapers)
JEL-codes: C51 G12 G29 (search for similar items in EconPapers)
Date: 2012
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Citations: View citations in EconPapers (1183)

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Related works:
Working Paper: Econometric Measures of Connectedness and Systemic Risk in the Finance and Insurance Sectors (2011)
Chapter: Econometric Measures of Connectedness and Systemic Risk in the Finance and Insurance Sectors (2010)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jfinec:v:104:y:2012:i:3:p:535-559

DOI: 10.1016/j.jfineco.2011.12.010

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