Financial Connectedness Research Articles

A Matrix-Variate t Model for Networks.

Networks represent a useful tool to describe relationships among financial firms and network analysis has been extensively used in recent years to study financial connectedness. An aspect, which is often neglected, is that network observations come with errors from different sources, such as estimation and measurement errors, thus a proper statistical treatment of the data is needed before network analysis can be performed. We show that node centrality measures can be heavily affected by random errors and propose a flexible model based on the matrix-variate t distribution and a Bayesian inference procedure to de-noise the data. We provide an application to a network among European financial institutions.

COVID-19 Spreading in Financial Networks: A Semiparametric Matrix Regression Model

Network models represent a useful tool to describe the complex set of financial relationships among heterogeneous firms in the system. In this paper, we propose a new semiparametric model for temporal multilayer causal networks with both intra- and inter-layer connectivity. A Bayesian model with a hierarchical mixture prior distribution is assumed to capture heterogeneity in the response of the network edges to a set of risk factors including the European COVID-19 cases. We measure the financial connectedness arising from the interactions between two layers defined by stock returns and volatilities. In the empirical analysis, we study the topology of the network before and after the spreading of the COVID-19 disease.

Time-frequency analysis of dynamic financial connectedness: A new approach with Bayesian time-varying vector autoregressions

Time-frequency analysis of dynamic financial connectedness: A new approach with Bayesian time-varying vector autoregressions

Dynamic financial connectedness in emerging and developed countries during the COVID-19 outbreak

Dynamic financial connectedness in emerging and developed countries during the COVID-19 outbreak

Hisse Senedi Piyasalarında Frekans Bağlantılılığı ve Ağ Analizi: G-7 Ülkeleri Üzerine Bir Uygulama

In this study, we explore the cross-market volatility transmissions between equity markets in G-7 countries by employing the frequency connectedness method. By implementing this approach, we estimate the dynamic interaction mechanism of systemic risk among strongly interconnected financial markets during financial calm and distress periods. Additionally, we exhibit network topologies of directional spillovers to capture the financial connectedness of G-7 countries. The findings of the study propose that systemic risk contagion between G7 countries intensifies during financial turmoils and underlines the importance of an effective regulatory framework to monitor financial stress.

Gelişmekte Olan Piyasalarda Finansal Bağlantılılık

This study aims to examine the financial connectedness between emerging E7 (Brazil, Russia, India, China, Indonesia, Mexico and, Turkey) stock markets. For this purpose, the connectedness between E7 stock markets was examined using the Diebold and Yilmaz (2009,2012) method for the period of 02 July 1997 - 24 June 2020. The findings of the study revealed that the total volatility spillover index among E7 country stock markets was low level. It was seen that the highest financial risk transition and risk receiving to other countries originated from the Mexican and Brazilian stock markets, respectively. On the other hand, the Chinese stock market remained at a low level in terms of risk transmission and risk receiving compared to the markets of the other six countries. In addition, the total volatility index was analyzed according to the 200-day rolling windows approach and the highest financial risk transition between E7 country stock markets was determined as the COVID-19 pandemic period. However, according to the 200-day rolling windows approach, the period in which the financial risk transition between E7 country stock markets is the highest indicates the COVID-19 pandemic period. Considering the findings obtained from the study, it is thought that the study is important for portfolio managers and market regulators in portfolio diversification and for estimating market volatility.

Forecasting macroeconomy using Granger-causality network connectedness

ABSTRACT The connectedness among financial institutions reflects potential channels for risk contagion and the amplification of risk to the financial system that can also propagate into the real economy. This study investigates the predictive power of financial network connectedness for macroeconomy. We highlight the connectedness by quantifying the effects of risk transmission among financial institutions in Granger-causality networks. The aggregate macroeconomy is viewed as a proxy for economic activity and is extracted from several monthly single macroeconomic variables by principal component analysis. We use the n-month-ahead multivariate predictive regressions to explore the predictive power of the connectedness and test whether the predictive ability is robust. The results show that after controlling for a number of factors, an increase in network connectedness among Chinese financial institutions strongly and stably predicts higher Chinese economic activity about four to twelve (except for five) months into the future.

Time-varying general dynamic factor models and the measurement of financial connectedness

We propose a new time-varying Generalized Dynamic Factor Model for high-dimensional, locally stationary time series. Estimation is based on dynamic principal component analysis jointly with singular VAR estimation, and extends to the locally stationary case the one-sided estimation method proposed by Forni et al. (2017) for stationary data. We prove consistency of our estimators of time-varying impulse response functions as both the sample size T and the dimension n of the time series grow to infinity. This approach is used in an empirical application in order to construct a time-varying measure of financial connectedness for a large panel of adjusted intra-day log ranges of stocks. We show that large increases in long-run connectedness are associated with the main financial turmoils. Moreover, we provide evidence of a significant heterogeneity in the dynamic responses to common shocks in time and over different scales, as well as across industrial sectors.

Oil price shocks, global financial markets and their connectedness

Abstract This paper extends the literature on the relationship between oil price shocks and financial markets by examining the effect of oil shocks on the sovereign bond markets of a large number of advanced and emerging economies and exploring the impact of oil shocks on the degree of connectedness among international financial markets. We show that the effect of oil price shocks is not only limited to stock market returns, but also extends to bond markets, even after controlling for discount rate shocks as well as aggregate capital market effects. Unlike the case for stock markets, the effect on sovereign bonds is found to be rather heterogeneous (in terms of size and sign) and primarily driven by demand related shocks. We also show that oil price shocks serve as a driver of connectedness patterns across global financial markets, although the effect on connectedness depends on the nature of the oil market shock and the economic characteristics of the countries. Overall, the findings highlight the role of crude oil as a driver of not only of return dynamics in global stock and bond markets, but also of global financial connectedness patterns.

Oil Price Shocks, Global Financial Markets and Their Connectedness

This paper extends the literature on the relationship between oil price shocks and financial markets by examining the effect of oil shocks on the sovereign bond markets of a large number of advanced and emerging economies and exploring the impact of oil shocks on the degree of connectedness among international financial markets. We show that the effect of oil price shocks is not only limited to stock market returns, but also extends to bond markets, even after controlling for discount rate shocks as well as aggregate capital market effects. Unlike the case for stock markets, the effect on sovereign bonds is found to be rather heterogeneous (in terms of size and sign) and primarily driven by demand related shocks. We also show that oil price shocks serve as a driver of connectedness patterns across global financial markets, although the effect on connectedness depends on the nature of the oil market shock and the economic characteristics of the countries. Overall, the findings highlight the role of crude oil as a driver of not only of return dynamics in global stock and bond markets, but also of global financial connectedness patterns.

Financial Connectedness and Financial Trade Openness

What determines a country’s financial trade openness? Because of the importance of financial services in the economy, many governments want to attract trade in financial services, including cross-border trade and FDI in the financial services industry. Therefore, it is commonly assumed that the more the financial sector is linked to the rest of the economy, the more a country will open up trade in financial services. However, my analysis finds that the reverse is true. The more connected the financial industry to the rest of the economy, the more a country restricts its financial trade openness. I argue that a higher degree of financial connectedness exposes more domestic financial firms to competition with foreign financial firms, leading governments to selectively liberalize the financial industry through entry restrictions. To test my argument, I have created two original datasets on financial connectedness and financial trade restrictions in 51 countries. I find the cross-country variation in the degree of financial connectedness to be the key factor determining variation of financial trade openness around the world.

Dynamic asymmetric financial connectedness under tail dependence and rendered time variance: Selected evidence from emerging MENA stock markets

We study the volatility connectedness of stock market prices over various time horizons. We adopt a novel combination of copula and the asymmetric GARCH function (EGARCH) to fit this type of joint distribution consisting of the marginal distribution and the varying rendered time. The most obvious finding to emerge from this study is that the dynamic connectedness of asymmetries in the chosen sample can well be modelled using a combination approach, such as the DCC Copula-GARCH model. Moreover, past-return volatility has a positive impact on current versatility with varying intensity.

A dominance test for measuring financial connectedness

This paper introduces a dominance test that allows to determine whether or not a financial institution can be classified as being more systemically important than another in a multivariate framework. The dominance test relies on a new risk measure, the ΔNetCoVaR that is specifically tailored to capture the joint extreme co-movements between institutions belonging to a network. The asymptotic theory for the statistical test is provided under mild regularity conditions concerning the joint distribution of asset returns which is assumed to be elliptically contoured. The proposed risk measure and risk measurement framework is used to analyse the US financial system during the recent Global Financial Crises. In the empirical analysis, the returns are assumed to be Elliptically Stable distributed and the estimation is carried out through the Sparse Multivariate Method of Simulated Quantiles, handling both the lack of an analytic expression for the probability density function and the potential high-dimensionality of the problem.

Spillover Effects among European, the US and Moroccan Stock Markets before and after the Global Financial Crisis

ABSTRACTThis paper assesses return and volatility spillovers among stock markets in Morocco, the US, UK, France and Germany represented respectively by MASI, S&P 500, FTSE 100, CAC 40 and DAX 30 indices, both before and after the global financial crisis (GFC) of 2008. The daily frequency data cover the period from January 2nd, 2002 to June 30th, 2016. Using the Diebold and Yilmaz approach, the results show varying financial connectedness between the Moroccan and the above mentioned developed stock markets. In fact, the significant increase of spillover index during the post-financial crisis period demonstrates that the US and European stock markets were the most affected. On the other hand, despite a relative increase of spillover effects coming from the US and German equity markets, our results show decline in the total net spillovers experienced by the Moroccan market after the recent financial crisis. These findings may provide some useful information to support decision-making and trading strategies for international investors.

Income inequality, financial flows and political institution: sub-Saharan African financial network

Using firm-level loan contracts, we generate aggregate measures of financial connections and examine how these indices relate to income inequality in sub-Saharan African (SSA) countries. The results reveal that more connectedness is not beneficial for these economies as shown by the degree and the eigenvector indices. Betweenness centrality worsens income inequality such that the act of intermediation in the provision of financing remains detrimental to net and market income inequalities. Independent access to funding has no significant effect on income inequality. While accounting for the influence of political instability, the results reveal that financial connectedness is beneficial in reducing income inequality.

THE EFFECTS OF VOLATILITY SPILLOVER ON THE LARGEST GLOBAL FINANCIAL MARKET SEGMENTS

The aim of the paper is to present and analyse indicators of financial connectedness and volatility spillover on important segments of the global financial market – the stock market, bond market, CDS market, and foreign exchange market. Total, net, and directional measures of volatility spillover are presented and analysed, indicating the level of connectedness of countries’ particular market segments and the level of volatility spillover in periods of crisis and stability.

Financial Stress Connectedness and Network Analysis

Financial instability in one country may quickly spread out to the rest of the world on different transmission channels. This leads to financially connected countries and creates a risk of rapid contagion of the financial crisis. The last global financial crisis was an example of this contagion effect. Therefore, the financial connectedness of both developed and developing countries is very important in order to determine the spillovers of financial stress across countries. In this study, we follow Diebold and Yilmaz approaches and examine total, directional and net spillovers between high frequency (daily) financial stress indexes of 9 countries from 2007/03/17 through 2016/11/17. In addition, we analyze the 200-day rolling window of the total spillover index with well-known financial stress events. Finally, the network topology of directional spillovers is given to visualize financial connectedness.

Time-Varying General Dynamic Factor Models and the Measurement of Financial Connectedness

We propose a new time-varying Generalized Dynamic Factor Model for high-dimensional, locally stationary time series. Estimation is based on dynamic principal component analysis jointly with singular VAR estimation, and extends to the locally stationary case the one-sided estimation method proposed by Forni et al. (2017) for stationary data. We prove consistency of our estimators of time-varying impulse response functions as both the sample size T and the dimension n of the time series grow to infinity. This approach is used in an empirical application in order to construct a time-varying measure of financial connectedness for a large panel of adjusted intra-day log ranges of stocks. We show that large increases in long-run connectedness are associated with the main financial turmoils. Moreover, we provide evidence of a significant heterogeneity in the dynamic responses to common shocks in time and over different scales, as well as across industrial sectors.

Global Banks and Systemic Risk: The Dark Side of Country Financial Connectedness

We study the relation between country financial connectedness and systemic risk for U.S. banking organizations with global exposures. We find that banks with more foreign claims in countries that are well connected to global financial markets contribute more to U.S. systemic risk. We document specific bank-level (systemic importance and leverage) and country-level (financial crises) channels that amplify these effects. We also document the roles different forms of connectedness, and types and sectors of foreign claims, play for cross-border risk propagation. Our findings are particularly relevant for macro-prudential policy given the concentration of U.S. financial claims in well-connected markets.

Parenting and Late Adolescents’ Well-Being in Greece, Norway, Poland and Switzerland: Associations with Individuation from Parents

Cross-cultural studies focusing on individuation and parent-child relationships during late adolescence in the European context are sparse. This study investigated relationships between maternal and paternal responsiveness, demandingness and autonomy granting and late adolescents’ subjective well-being in Greece, Norway, Poland, and Switzerland. Additionally, the role of psychological, functional, and financial aspects of adolescents’ individuation in these relationships were assessed. Late adolescents (18–20-years-old, N = 745) reported on their parents’ behaviors and themselves. Structural models with latent constructs were applied to test the hypothesized relationships. Results showed that in all four countries, maternal and paternal autonomy granting and responsiveness were positively associated with adolescents’ well-being. No significant results were found for demandingness. Further, the study found that psychological and functional connectedness with mothers and financial connectedness with fathers partially explained the associations between parenting behaviors and adolescents’ well-being. The results indicate more similarities than differences across Europe in the associations between parenting on late adolescents’ outcomes. More importantly, the study points out that maternal and paternal parenting may play different roles in late adolescence.