Measuring Interconnectedness Between Financial Institutions with Bayesian Time-Varying Vector Autoregressions

Posted: 24 Dec 2015 Last revised: 1 Jun 2018

See all articles by Marco Valerio Geraci

Marco Valerio Geraci

University of Cambridge - Cambridge-INET Institute

Jean-Yves Gnabo

Facultés Universitaires Notre-Dame de la Paix (FUNDP)

Date Written: December 1, 2015

Abstract

We propose a market-based framework that exploits time-varying parameter vector autoregressions to estimate the dynamic network of financial spillover effects. We apply it to financials in the Standard & Poor's 500 index and estimate interconnectedness at the sector and institution level. At the sector level, we uncover two main events in terms of interconnectedness: the Long Term Capital Management crisis and the 2008 financial crisis. After these crisis events, we find a gradual decrease in interconnectedness, not observable using the classical rolling window approach. At the institution level, our framework delivers more stable interconnectedness rankings over time than other market-based measures of systemic risk.

Note: N.B. The full article appears in the Journal of Financial and Quantitative Analysis published by Cambridge University Press. © 1995-2018, Foster School of Business, University of Washington

Keywords: financial interconnectedness, time-varying parameter, systemic risk

JEL Classification: G01, G18, C32, C51, C58

Suggested Citation

Geraci, Marco Valerio and Gnabo, Jean-Yves, Measuring Interconnectedness Between Financial Institutions with Bayesian Time-Varying Vector Autoregressions (December 1, 2015). Journal of Financial and Quantitative Analysis (JFQA) doi: 10.1017/S0022109018000108, Available at SSRN: https://ssrn.com/abstract=2707721 or http://dx.doi.org/10.2139/ssrn.2707721

Marco Valerio Geraci (Contact Author)

University of Cambridge - Cambridge-INET Institute ( email )

Sidgwick Avenue
Cambridge, CB3 9DD
United Kingdom

Jean-Yves Gnabo

Facultés Universitaires Notre-Dame de la Paix (FUNDP) ( email )

Rempart de la Vierge, 8
Namur B-5000
Belgium

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