Intensity Of Spillovers Research Articles

Static and dynamic liquidity spillovers in the Eurozone: The role of financial contagion and the Covid-19 pandemic

This paper investigates static and dynamic liquidity spillovers for a pool of ten Eurozone countries for the period 2000–2021. We estimate a generalised vector autoregressive (VAR) model based on Diebold and Yilmaz (2009, 2012). We find evidence for static and dynamic transmission of shocks through the liquidity channel. We propose a static measure of liquidity spillovers which captures total and pairwise average spillovers across Eurozone countries. Our measure shows strong evidence of interconnection within the Eurozone through the liquidity channel. We investigate the dynamic intensity and direction of liquidity spillovers, finding significant evidence of contagion during crisis periods. Our results indicate that most of the shocks during periods of financial uncertainty arise from leading economies within the Euro area.

Financial Linkages and Sectoral Business Cycle Synchronization: Evidence from Europe

We analyze whether financial integration leads to converging or diverging business cycles using a dynamic spatial model. Our model allows for contemporaneous spillovers of shocks to GDP growth between countries that are financially integrated and delivers a scalar measure of the spillover intensity at each point in time. For a financial network of ten European countries from 1996 to 2017, we find that the spillover effects are positive on average and much larger during periods of financial stress, pointing towards stronger business cycle synchronization. Dismantling GDP growth into value added growth of ten major industries, we observe that spillover intensities vary significantly. The findings are robust to a variety of alternative model specifications.

Examining interconnectedness between media attention and cryptocurrency markets: A transfer entropy story

This note aims at using transfer entropy as a broader concept of causality than Granger’s approach to measure the direction and the intensity of spillovers between five major cryptocurrencies. For this purpose, we use two channels of transmission: price movements and Google-based investor attention. Our results shed light on the dominance of only a few cryptocurrencies, in their influences on price movements as well as on media attention in the other cryptocurrencies.

Quantile Connectedness: Modeling Tail Behavior in the Topology of Financial Networks

We develop a new technique to estimate vector autoregressions with a common factor error structure by quantile regression. We apply our technique to study credit risk spillovers among a group of 17 sovereigns and their respective financial sectors between January 2006 and December 2017. We show that idiosyncratic credit risk shocks propagate much more strongly in both tails than at the conditional mean or median. Furthermore, we develop a measure of the relative spillover intensity in the right and left tails of the conditional distribution that provides a timely aggregate measure of systemic financial fragility and that can be used for risk management and monitoring purposes. This paper was accepted by Gustavo Manso, finance.

Investment in process innovation in supply chains with knowledge spillovers under innovation uncertainty

In this paper, we consider two supply chains each consisting of a manufacturer sells products to customers through an exclusive retailer to investigate the issue of whether the manufacturers with differentiated absorptive capacity will invest in uncertain process innovation under knowledge spillovers. To this end, we develop game-theoretic models with bilateral investment, unilateral investment, and no-investment. Analysis of the equilibrium outcomes shows that the manufacturers when confronted with weak (strong) spillovers will (not) invest. If a manufacturer’s knowledge seldom spills over while the opposite is true for the competitor, they behave as the unique investor and free-rider, respectively. If both of them are exposed to medium spillovers, there exist thresholds below which the investment strategies are asynchronous, and they are synchronous otherwise. Moreover, we reveal that: (i) bilateral investment may yield lose-lose, lose-win, win-lose, or win-win outcomes for the manufacturers; (ii) the manufacturer with weak absorptive capacity may invest even though it almost learns nothing from external knowledge; and (iii) if the success probability of innovation is high, the investment strategies hinge on the intensity of knowledge spillovers. Otherwise, the manufacturers generally have fewer incentives to invest. Finally, we extend the model to verify the robustness of the key findings in situations with cross-selling and channel integration, respectively, as well as shed some light on the effects of different supply chain structures on the manufacturers’ incentives to invest in uncertain process innovation.

Financial stress spillover network across Asian countries in the context of COVID-19

ABSTRACT Using the dynamic connectedness framework of Antonakakis et al. (2020), this paper explores the financial stress spillover characteristic across nine Asian countries during major economic, political and public health emergency events, especially during COVID-19. We first find a substantial increase in the intensity of total financial stress spillover across nine Asian countries during COVID-19. Second, there are clear differences in the financial stress spillover networks across Asian countries during different economic and political events. In particular, in the first three months after the outbreak of COVID-19, there was considerable month-to-month variation in the financial stress spillover network. Singapore and Japan are the major net transmitter and receiver of financial stress shocks, respectively, during all considered events. During COVID-19, China, as the first country to detect and contain COVID-19, is the strongest net financial stress shock receiver in March 2020, but transmitted net financial stress shocks in February 2020, when the epidemic in China is serious.

Not Enough R&D? Or Maybe Too Much? Intensity of Knowledge Spillovers and Optimal R&D Policy in Schumpeterian Growth Theory

This paper presents an endogenous growth model à la Aghion & Howitt (1992) in which we explicitly formalize knowledge spillovers in the innovation process. We revisit the issue of the Pareto non-optimality of the Schumpeterian equilibrium by revealing the part played by the intensity of knowledge spillovers. Basically, we highlight that the market incompleteness characterizing this type of decentralized economy (knowledge is not priced) is all the more likely to lead to an under-optimal (resp. over-optimal) R&D effort as the intensity of knowledge spillovers is high (resp. low). The reason behind this is that the effects of the distortion of R&D incentives resulting from market incompleteness are amplified all the more as this intensity is strong. Complementarily, we derive the optimal tool dedicated to correct the market failure caused by market incompleteness, and we demonstrate that it clearly depends on the intensity of knowledge spillovers: the higher (resp. lower) the intensity of knowledge spillovers is, the more likely this policy tool should consist in a subsidy (resp. tax). Moreover, if this optimal tool happens to be a subsidy, then this subsidy will be all the larger as the intensity is high.

International monetary policy spillovers: Linkages between U.S. and South American yield curves

This paper investigates spillovers between the latent factors of the term structure of the interest rates of the United States and selected South American countries. We show how interest rates of different maturities of these countries interact. The term structure of the interest rate is estimated using the Dynamic Nelson-Siegel model, extracted through the Kalman filter. The main contribution of this article is the use of these spillover indices for stock markets developed by Diebold and Yilmaz (2009, 2012) for the relation between term structures of different countries. The results show a high degree of spillover in the level (22.79%), slope (25.53%), and curvature (15.18%) factors, with high oscillation of transmission intensities over time. There is a substantial increase in the spillover index during financial crises and other high-volatility periods. The results are important because they show the existence and intensity of international monetary spillovers, serving as a framework for the calibration of models used in monetary policy, as they are sensitive to international shocks. Moreover, changes in the interest rate levels may have impact on sectors that are sensitive to long-term rates and global bond markets.

Measuring the connectedness of global health sector stock markets

This paper uses the minimum spanning tree model to investigate the dependency structure and integration degree of the global health sector stock markets. It examines the direction, intensity, time-varying characteristics, and asymmetric effects of return connectedness among these stock markets using the directional connectedness network model. It also explores the hedging and diversification analyses of global health sector stock markets. The empirical results suggest that health sector stock markets of the developing and developed countries show obvious group clustering characteristics, forming a low level of integration between the two groups and a high degree of integration within each group. For the return connectedness network, France, the UK, the US, and Germany are net return transmitters. India, Canada, China, Japan, and South Africa are net return recipients. Meanwhile, return spillovers among health sector stocks in these nine countries have obvious time-varying characteristics. In particular, the 2008 global financial crisis increased the integration level among global health sector stock markets. Moreover, there exists a significant asymmetric effect of return spillover among the global health sector stock markets, and the return spillover intensity in a declining market is significantly higher than it is in favourable market conditions. Finally, diversification evidence shows the optimal hedge ratios and portfolio weights across all nine countries changes over time.

Risk of spillovers between the Chinese and international crude oil futures’ markets: A dynamic Copula-CoES approach

To overcome the limitations of conditional value-at-risk (CoVaR), the upside conditional expected shortfall (CoES) is proposed and used as a measure of the extreme risk spillover effect between the Chinese and international crude oil futures markets. Then, the calculation formula of the upside CoES is given under the semiparametric dynamic Copula model, which does not need to set the specific evolution equation of the Copula parameters. The empirical results show that there is a strong positive correlation between Chinese and international crude oil futures, and the correlation gradually increases when oil prices rise. There is a significant two-way risk spillover effect for both of them, and the average risk spillover intensity between Chinese crude oil futures (INE) and West Texas intermediate crude oil futures (WTI) is the highest. Moreover, INE is not always the recipient of the price fluctuation risk. In particular, INE has played the role of risk spillover most of the time after 2019. This study provides new ideas for the measurement of risk spillovers.

Measuring the systemic importance of banks

We provide a new metric for the systemic importance of banks based on the intensity of spillovers of daily CDS movements. We denote this a bank’s Individual Systemic Risk (ISR). Our novel empirical tool uses Bayesian VAR to address the dimensionality problem in large networks of banks and maps for every pair of banks in the system the shocks that they exchange. We apply this tool to all banks that issue publicly traded CDS contracts among the world’s biggest 150 and identify which of these may trigger instability in the global financial system. Our methodology provides measures that are relatively stable across time, contain persistent information, have strong explanatory power for standard variables of systemic risk, and provided early warning signals in the case study of Deutsche Bank in mid-2016. Using our ISR measure, we demonstrate which bank- and country-specific characteristics are related to bank systemic importance. We find higher systemic importance for banks that are relatively larger, less profitable, have G-SIB status, and are headquartered in economies with fiscally strong sovereigns. We also show that there is a negative relationship between concentration in the domestic banking sector and the systemic importance of a bank. We examine the relationship of ISR to alternative systemic risk metrics.

This Town Ain't Big Enough? Quantifying Public Good Spillovers

Despite long-standing theoretical interest, empirical attempts at investigating the appropriate level of decentralization remain scarce. This paper develops a simple and flexible framework to test for the presence of public good spillovers between fiscally autonomous jurisdictions and to investigate potential welfare gains from marginal fiscal integration. We build a quantitative spatial equilibrium model with many local jurisdictions, mobile households and endogenous local public goods causing spillovers across jurisdictional boundaries. We show how one can exploit migration and housing price responses to shocks in local public goods at different geographic scales to reveal the intensity of spillovers. Applying our framework to the particularly fragmented French institutional setting, we structurally estimate the model using a unique combination of municipal administrative panel datasets. Estimation relies on plausibly exogenous variations in government subsidies to instrument changes in the supply of public goods. We find that public goods in a municipality account for 4--11% of the local public good bundle enjoyed by its residents, and that public goods in each neighbor municipality account for an average 3.2--3.5% of this bundle. Finally, we simulate the effect of a reform increasing fiscal integration and find substantial welfare gains

Promoting generalist predators of crop pests in alley cropping agroforestry fields: Farming system matters

Developing agroecological practices that enhance biological control of crop pests is a major issue for the transition of agriculture towards sustainable and biodiversity-friendly systems. Agroecological infrastructures (AEI) are devoted to the support of ecosystem service providers, although they have mixed effects on natural enemies of crop pests. In temperate regions, alley cropping agroforestry involves within-field AEI, in the form of tree rows and associated understory vegetation strips. The objective of this study was to assess the potential of generalist predators (carabid beetles and cursorial spiders) to control weed seeds and invertebrate pests in alley cropping vs pure crop systems, under two contrasting farming systems (conventional vs organic). Predator surveys were carried out in May and June 2017 in South-Western France over 12 winter cereal fields. Our study revealed that the effect of alley cropping was modulated by the farming system. Under conventional farming, alley cropping had a negative effect on the activity-density and species richness of generalist predators, especially regarding carnivorous carabids whose activity-density was reduced by nearly 50%. Under organic farming, alley cropping enhanced both the activity-density and complementarity of generalist predators, with a two-fold increase in the activity-density of seed-feeding carabids (predominantly granivorous and omnivorous), potentially promoting weed seed and invertebrate pest control. Our results suggest that the effectiveness of AEI in promoting natural enemies depends on the farming system at the field scale, which affects resource availability and determines spillover intensity between habitats. AEI are often perceived as sources of natural enemies. However, sink and retention effects (i.e. reduced or delayed spillover into crop fields due to higher attractiveness of AEI) should not be overlooked as they can explain the mixed impacts of AEI on natural enemy communities.

Pricing strategies for O2O business model considering service spillover and power structures

AbstractIn contradistinction to the traditional dual‐channel retail model, the online and offline channels are two business units of a single retailer in an online to offline (O2O) business model. The service‐related effort of the offline channel has a spillover effect on the online channel. This paper establishes three game‐theoretic models to analyze how service spillover and power structures affect supply chain members’ performance in the O2O business model. The main results are as follows. First, a service spillover effect is always beneficial to the manufacturer's profit due to the increasing wholesale price and total demand in all three scenarios. Second, unlike the traditional dual‐channel model, service spillover does not inevitably cause price competition in the O2O dual‐channel model. Under different power structure conditions, the spillover intensity has a significant effect on the retailer's profit and service strategy. When the manufacturer is a Stackelberg leader, the effects of spillover on a retailer's profit depend on online channel acceptance level and service level. A service differentiation strategy can help the retailer increase profit margins under certain situations. When the manufacturer and retailer have the same power, retailer's profit increases with spillover intensity, and a service consistency strategy can be implemented. When the retailer is a Stackelberg leader, the retailer's profit decreases first and then increases, and a service mixed strategy will reduce the loss of retailer's profit. Finally, the switch in dominant power between manufacturer and retailer has no impact on retail prices and demand. The total supply chain profit in two Stackelberg models is also equivalent, but lower than that in the Nash model.

Quantity decision timing with spillover effect and asymmetric demand information

This study investigates how the spillover effect of retail service investment affects timing preference of quantity decision in a dual-channel supply chain under asymmetric demand information. The manufacturer-quantity-leader game and retailer-quantity-leader game are considered. Applying a signaling game-theoretic approach, we show that, for the chain members, whether to occupy the quantity decision leadership or not is conditional on the spillover intensity and the demand information value. We also identify certain conditions where the chain members can achieve a consensus on the quantity decision timing.

Measuring the importance of RMB in the exchange rate spill-over networks: new indices of RMB internationalisation

Using an innovative network approach, this study constructs new indices of the renminbi (RMB) internationalisation and presents strong evidence of the RMB’s growing influence globally and regionally. We identify networks of exchange rate spill-overs and examine time-varying spill-over intensities among the RMB and world major currencies of G20 members as well as currencies related to the Belt and Road Initiative (BRI). Shocks from the RMB generate intensifying spill-overs across currency networks. The role of the RMB in the networks has increased steadily over time. Our findings highlight that the RMB has become increasingly important since China has initiated the marketisation reform of its currency and proposed to build the modern Belt and Road.

Research on Information Spillover Effect of the RMB Exchange Rate and Stock Market Based on R-Vine Copula

This paper studies the dependence structure and information spillover effect between the RMB exchange rate and the Chinese stock market based on the R-vine copula model and spillover index model. The results show that due to the occurrence of the trade war, the correlation between the three RMB exchange rate indicators and the two stock market indicators increases in varying degrees. In the intensity of spillover, the information spillover of the stock market to the RMB exchange rate is significantly enhanced, and the information spillover intensity of the RMB Index to the stock market increases, but the information spillover of the US dollar and Hong Kong dollar exchange rates to the stock market is significantly weakened. In the direction of spillover, the spillover of the RMB Index and stock market shows the characteristics of alternating transformation, while the exchange rate of a single currency and the stock market shows a one-way transmission from the stock market to the exchange rate. Additionally, the information spillover between the RMB exchange rate and the stock market is closely related to the degree of market openness. The RMB Index contains more information than the exchange rate of a single currency.

Common shocks, common transmission mechanisms and time-varying connectedness among Dow Jones Islamic stock market indices and global risk factors

The purpose of this paper is twofold. First, we examine the importance of permanent versus transitory shocks as well as their domestic and foreign components in explaining the business cycle fluctuations of seven Dow Jones Islamic stock markets (DJIM), namely U.S., U.K., Canada, Europe, Asia-Pacific, Japan and GCC, over the period from April 2003 to November 2018, using the permanent-transitory (P-T) decompositions approach of Centoni et al. (2007). Second, we investigate the spillover mechanisms of these shocks across Islamic stock markets and a set of global risk factors, using the Diebold and Yilmaz (DY) (2012) approach. The P-T decomposition results show that the DJIM U.S., U.K., Europe and GCC indices are sensitive to both domestic and foreign shocks, while the DJIM Canada, Japan and Asia-Pacific are most sensitive to domestic shocks. The empirical results of the DY approach indicate that: (i) the return and volatility spillover intensity increase during financial turmoil, supporting evidence of the contagion phenomenon, (ii) the DJIM U.S. is the main transmitter of return and volatility spillovers, while the DJIM GCC is identified as the main receiver of both return and volatility spillovers, (iii) the seven Dow Jones Islamic stock indices are weakly linked to movements of global risk factors, and (iv) there is evidence of possible portfolio diversification between the selected Islamic stock markets and the oil commodity market.

Another look at value and momentum: volatility spillovers

This paper examines volatility interdependencies between value and momentum returns. Using U.S. data over the period 1926–2015, we document persistent periods of low and high volatility spillovers between value and momentum strategies. Moreover, we find that the intensity of the volatility spillovers may change substantially in very short periods of time and that these shifts in spillover intensity can be linked to prominent economic events and financial market turmoil. Our results further demonstrate that value returns increase and momentum returns decrease monotonically with increasing volatility spillovers between the two strategies. Given this linkage between spillover intensity and returns, we propose a simple trading strategy which utilizes a volatility spillover index for allocating funds between value and momentum portfolios. The proposed trading strategy outperforms value and momentum strategies and generates payoffs that are not subject to option-like behavior.

Measuring the Systemic Importance of Banks

We provide a new metric for the systemic importance of banks based on the intensity of spillovers of daily CDS movements. We denote this a bank’s Individual Systemic Risk (ISR). Our novel empirical tool uses Bayesian VAR to address the dimensionality problem in large networks of banks and maps for every pair of banks in the system the shocks that they exchange. We apply this tool to all banks that issue publicly traded CDS contracts among the world’s biggest 150 and identify which of these may trigger instability in the global financial system. Our methodology provides measures that are relatively stable across time, contain persistent information, have strong explanatory power for standard variables of systemic risk, and provided early warning signals in the case study of Deutsche Bank in mid-2016. Using our measure, ISR, we demonstrate which bank- and country-specific characteristics are related to bank systemic importance. We find higher systemic importance for banks that are relatively larger, less profitable, have G-SIB status, and are headquartered in economies with fiscally strong sovereigns. We also show that there is a negative relationship between concentration in the domestic banking sector and the systemic importance of a bank. We examine the relationship of ISR to alternative systemic risk metrics.