On the Network Topology of Variance Decompositions: Measuring the Connectedness of Financial Firms

38 Pages Posted: 4 Oct 2011

See all articles by Francis X. Diebold

Francis X. Diebold

University of Pennsylvania - Department of Economics; National Bureau of Economic Research (NBER)

Kamil Yilmaz

Koc University

Multiple version iconThere are 4 versions of this paper

Date Written: September 30, 2011

Abstract

The authors propose several connectedness measures built from pieces of variance decompositions, and they argue that they provide natural and insightful measures of connectedness among financial asset returns and volatilities. The authors also show that variance decompositions define weighted, directed networks, so that their connectedness measures are intimately-related to key measures of connectedness used in the network literature. Building on these insights, the authors track both average and daily time-varying connectedness of major U.S. financial institutions' stock return volatilities in recent years, including during the financial crisis of 2007-2008.

Keywords: Risk measurement, risk management, portfolio allocation, market risk, credit risk, systemic risk, asset markets, degree distribution

JEL Classification: C3, G2

Suggested Citation

Diebold, Francis X. and Yilmaz, Kamil, On the Network Topology of Variance Decompositions: Measuring the Connectedness of Financial Firms (September 30, 2011). FRB of Philadelphia Working Paper No. 11-45. Available at SSRN: https://ssrn.com/abstract=1937894 or http://dx.doi.org/10.2139/ssrn.1937894

Francis X. Diebold (Contact Author)

University of Pennsylvania - Department of Economics ( email )

Ronald O. Perelman Center for Political Science
133 South 36th Street
Philadelphia, PA 19104-6297
United States
215-898-1507 (Phone)
215-573-4217 (Fax)

HOME PAGE: http://www.ssc.upenn.edu/~fdiebold/

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Kamil Yilmaz

Koc University ( email )

Rumeli Feneri Yolu
Sariyer
Istanbul, 34450
Turkey
+90 212 338 1458 (Phone)
+90 212 338 1653 (Fax)

HOME PAGE: http://home.ku.edu.tr/~kyilmaz

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