Volatility spillover features in financial industries and identification of systemically important financial institutions: A new perspective

Hu Wang and Xin Liu

Pacific-Basin Finance Journal, 2024, vol. 83, issue C

Abstract: We study the spillover effects between financial industries and the identification of systemically important financial institutions (SIFIs) from a new perspective. The total volatility is decomposed into two categories, i.e., good volatility triggered by positive returns and bad volatility triggered by negative returns, which are applied to the volatility spillover index (the DY spillover index) model (Diebold and Yilmaz, 2012; 2014) to study the volatility spillover effects between different financial industries based on different types of volatility. We construct the total, good, and bad volatility spillover networks and use PageRank to measure the systemic importance of financial institutions based on the three networks and compare them with the risks of financial institutions obtained by the three risk measurement methods of ΔCoVaR, MES, and SRISK. By decomposing total volatility into good volatility triggered by positive returns and bad volatility triggered by negative returns, the positive and negative impacts of different financial industries during different periods can be effectively identified to accurately evaluate the risk levels of different financial industries. The results indicate that the PageRank rankings of financial institutions calculated by the bad volatility spillover network have the highest correlation with the risk rankings of financial institutions calculated by ΔCoVaR, MES, and SRISK. The findings suggest the necessity of decomposing the spillover effects between financial industries into good spillover effects triggered by positive returns and bad spillover effects triggered by negative returns, providing a new way of identifying SIFIs.

Keywords: Volatility spillover; Financial industries; Systemically important financial institutions; PageRank (search for similar items in EconPapers)
JEL-codes: C32 G21 G23 (search for similar items in EconPapers)
Date: 2024
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:pacfin:v:83:y:2024:i:c:s0927538x23003128

DOI: 10.1016/j.pacfin.2023.102241

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