48 Pages Posted: 16 Sep 2013 Last revised: 15 Sep 2014
Date Written: September 14, 2014
The global financial crisis has reignited interest in models of crisis prediction. It has also raised the question whether financial interconnectedness -- a possible source of systemic risk -- can serve as an early warning indicator of crises. In this paper we examine the ability of connectedness in the global network of financial linkages to predict systemic banking crises during the 1978-2010 period. Our results indicate that increases in a country's own connectedness and decreases in its neighbors' connectedness are associated with a higher probability of banking crises after controlling for macroeconomic fundamentals. Our findings suggest that financial interconnectedness has early-warning potential, especially for the 2007-2010 wave of systemic banking crises.
Keywords: early warning systems, systemic risk, financial networks, banking crises
JEL Classification: G01, F36, F47
Suggested Citation: Suggested Citation
Minoiu, Camelia and Kang, Chanhyun and Subrahmanian, V.S. and Berea, Anamaria, Does Financial Connectedness Predict Crises? (September 14, 2014). Available at SSRN: https://ssrn.com/abstract=2326429 or http://dx.doi.org/10.2139/ssrn.2326429