Dynamic structure of the US financial systems

Abstract

Purpose – This paper empirically investigates the structural evolution of the US financial systems. It particularly aims to explore if the structure of the financial systems changes when the economy enters a recession.Design/methodology/approach – The empirical analysis is conducted through the statistical approach of principal components analysis (PCA) and the graph theoretic approach of minimum spanning trees (MSTs).Findings – The PCA results suggest that the VIX was the dominant factor influencing the financial system prior to the recession; however, the monetary policy represented by the three‐month T‐bill yield became the leading factor in the system during the recession. By analyzing the MSTs, we find evidence that the structure of the financial system during the economic recession is substantially different from that during the period of economic expansion. Moreover, we discover that the financial markets are more integrated during the economic recession. The much stronger integration of the financ...