Econometric measures of connectedness and systemic risk in the finance and insurance sectors |
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Authors: | Monica Billio Mila Getmansky Andrew W. Lo Loriana Pelizzon |
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Affiliation: | 1. University of Venice and SSAV, Department of Economics, Fondamenta San Giobbe 873, 30100 Venice, Italy;2. Isenberg School of Management, University of Massachusetts, 121 Presidents Drive, Room 308C, Amherst, MA 01003, United States;3. MIT Sloan School of Management, 100 Main Street, E62-618, Cambridge, MA 02142, United States;4. AlphaSimplex Group, LLC, United States |
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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. |
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Keywords: | Systemic risk Financial institutions Liquidity Financial crises |
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