On the Network Topology of Variance Decompositions: Measuring the Connectedness of Financial Firms
38 Pages Posted: 4 Oct 2011
Date Written: September 30, 2011
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: Suggested Citation