Measuring the Frequency Dynamics of Financial Connectedness and Systemic Risk

Journal of Financial Econometrics, Volume 16, Issue 2, 2018

Posted: 8 Jul 2015 Last revised: 30 Dec 2018

See all articles by Jozef Baruník

Jozef Baruník

Charles University in Prague - Department of Economics; Institute of Information Theory and Automation, Prague

Tomas Krehlik

Charles University in Prague; Academy of Sciences of the Czech Republic

Date Written: December 15, 2017

Abstract

We propose a new framework for measuring connectedness among financial variables that arises due to heterogeneous frequency responses to shocks. To estimate connectedness in short-, medium-, and long-term financial cycles, we introduce a framework based on the spectral representation of variance decompositions. In an empirical application, we document the rich time-frequency dynamics of volatility connectedness in US financial institutions. Economically, periods in which connectedness is created at high frequencies are periods when stock markets seem to process information rapidly and calmly, and a shock to one asset in the system will have an impact mainly in the short term. When the connectedness is created at lower frequencies, it suggests that shocks are persistent and are being transmitted for longer periods.

Keywords: Connectedness, frequency, spectral analysis, market risk, business cycles

JEL Classification: C18, C58, G15

Suggested Citation

Barunik, Jozef and Krehlik, Tomas, Measuring the Frequency Dynamics of Financial Connectedness and Systemic Risk (December 15, 2017). Journal of Financial Econometrics, Volume 16, Issue 2, 2018, Available at SSRN: https://ssrn.com/abstract=2627599

Jozef Barunik (Contact Author)

Charles University in Prague - Department of Economics ( email )

Opletalova 26
Prague 1, 110 00
Czech Republic

HOME PAGE: http://ies.fsv.cuni.cz/en/staff/barunik

Institute of Information Theory and Automation, Prague ( email )

Pod vodarenskou vezi 4
CZ-18208 Praha 8
Czech Republic

HOME PAGE: http://staff.utia.cas.cz/barunik/home.htm

Tomas Krehlik

Charles University in Prague ( email )

Praha 1
Czech Republic

Academy of Sciences of the Czech Republic ( email )

Narodni 3, 111 42
Praha 1, 117 20
Czech Republic

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