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Does Financial Connectedness Predict Crises?

48 Pages Posted: 16 Sep 2013 Last revised: 15 Sep 2014

Camelia Minoiu

International Monetary Fund (IMF); University of Pennsylvania - Management Department; University of Pennsylvania - Wharton Financial Institutions Center

Chanhyun Kang

University of Maryland - College of Computer, Mathematical and Natural Sciences

V.S. Subrahmanian

University of Maryland - College of Computer, Mathematical and Natural Sciences

Anamaria Berea

University of Maryland

Multiple version iconThere are 2 versions of this paper

Date Written: September 14, 2014

Abstract

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

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

Camelia Minoiu (Contact Author)

International Monetary Fund (IMF) ( email )

1700 19th Street, NW
Washington, DC USA 20431
United States
2026239731 (Phone)

HOME PAGE: http://https://sites.google.com/site/minoiucamelia/

University of Pennsylvania - Management Department ( email )

The Wharton School
Philadelphia, PA 19104-6370
United States

University of Pennsylvania - Wharton Financial Institutions Center ( email )

2306 Steinberg Hall-Dietrich Hall
3620 Locust Walk
Philadelphia, PA 19104
United States
2026830807 (Phone)

Chanhyun Kang

University of Maryland - College of Computer, Mathematical and Natural Sciences ( email )

2300 Symons Hall,
University of Maryland
College Park, MD 20742-3255
United States

V.S. Subrahmanian

University of Maryland - College of Computer, Mathematical and Natural Sciences ( email )

2300 Symons Hall,
University of Maryland
College Park, MD 20742-3255
United States

HOME PAGE: http://www.cs.umd.edu/~vs/

Anamaria Berea

University of Maryland ( email )

College Park
College Park, MD 20742
United States

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