Measuring the Propagation of Financial Distress with Granger-Causality Tail Risk Networks

34 Pages Posted: 10 Mar 2015 Last revised: 2 Mar 2018

Fulvio Corsi

University of Pisa - Department of Economics; City University London

Fabrizio Lillo

Università di Bologna

Davide Pirino

Department of Economics and Finance, University of Rome "Tor Vergata"

Luca Trapin

Scuola Normale Superiore

Date Written: February 28, 2018

Abstract

Using the test of Granger-causality in tail of Hong et al. (2009), we define and construct Granger-causality tail risk networks between 33 systemically important banks (G-SIBs) and 36 sovereign bonds worldwide. Our purpose is to exploit the structure of the Granger-causality tail risk networks to identify periods of distress in financial markets and possible channels of systemic risk propagation. Combining measures of connectedness of these networks with the ratings of the sovereign bonds, we propose a flight-to-quality indicator to identify periods of turbulence in the market. Our measure clearly peaks at the onset of the European sovereign debt crisis, signaling the instability of the financial system. Finally, we use the connectedness measures of the networks to forecast the quality of sovereign bonds. We find that connectedness is a significant predictor of the cross-section of bond quality.

Keywords: flight-to-quality, sovereign debt crisis, systemic risk, Granger causality, illiquidity, fire sales, bi-partite networks

JEL Classification: G00, G01, G21, H63, C12

Suggested Citation

Corsi, Fulvio and Lillo, Fabrizio and Pirino, Davide and Trapin, Luca, Measuring the Propagation of Financial Distress with Granger-Causality Tail Risk Networks (February 28, 2018). Available at SSRN: https://ssrn.com/abstract=2576078 or http://dx.doi.org/10.2139/ssrn.2576078

Fulvio Corsi

University of Pisa - Department of Economics ( email )

via Ridolfi 10
I-56100 Pisa, PI 56100
Italy

City University London ( email )

Northampton Square
London, EC1V OHB
United Kingdom

Fabrizio Lillo

Università di Bologna ( email )

Via Zamboni, 33
Bologna, 40126
Italy

Davide Pirino (Contact Author)

Department of Economics and Finance, University of Rome "Tor Vergata" ( email )

Via Columbia 2
Rome, Lazio 00133
Italy

Luca Trapin

Scuola Normale Superiore ( email )

Piazza dei Cavalieri, 7
Pisa, 56126
Italy

Register to save articles to
your library

Register

Paper statistics

Downloads
191
rank
144,506
Abstract Views
702
PlumX