Networks in Risk Spillovers: A Multivariate GARCH Perspective

52 Pages Posted: 4 Mar 2016

See all articles by Monica Billio

Monica Billio

University of Venice - Department of Economics; Ca Foscari University of Venice - Dipartimento di Economia

Massimiliano Caporin

University of Padua - Department of Statistical Sciences

Lorenzo Frattarolo

European Commission-Joint Research Centre

Loriana Pelizzon

Goethe University Frankfurt - Faculty of Economics and Business Administration; Leibniz Institute for Financial Research SAFE; Ca Foscari University of Venice - Dipartimento di Economia

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Date Written: February 4, 2016

Abstract

We propose a spatial approach for modeling risk spillovers using financial time-varying proximity matrices based on observable networks. We show how these methods could be useful in (i) isolating risk channels, risk spreaders and risk receivers, (ii) investigating the role of portfolio composition in risk transfer, and (iii) computing target exposure structures able to reduce the forecasted system variance and thus the risk of the system. Our empirical analysis builds on banks’ foreign exposures provided by the Bank of International Settlements (BIS) as a proxy for Euro area cross-country holdings. We find, in the European sovereign bond markets, that Germany, Italy and, to a lesser extent, Greece are playing a central role in spreading risk, and Ireland and Spain are the most susceptible receivers of spillover effects that can be traced back to a physical claim channel: banks’ foreign exposures. We additionally show that acting on these physical channels before the sovereign crisis, it would have been possible to have a clear risk mitigation outcome.

Keywords: spatial GARCH, network, risk spillover, financial spillover

JEL Classification: C58, G10

Suggested Citation

Billio, Monica and Billio, Monica and Caporin, Massimiliano and Frattarolo, Lorenzo and Pelizzon, Loriana, Networks in Risk Spillovers: A Multivariate GARCH Perspective (February 4, 2016). University Ca' Foscari of Venice, Dept. of Economics Research Paper Series No. No. 03/WP/ 2016, Available at SSRN: https://ssrn.com/abstract=2742051 or http://dx.doi.org/10.2139/ssrn.2742051

Monica Billio (Contact Author)

University of Venice - Department of Economics ( email )

Fondamenta San Giobbe 873
Venezia 30121
Italy
+39 041 234 9170 (Phone)
+39 041 234 9176 (Fax)

Ca Foscari University of Venice - Dipartimento di Economia ( email )

Cannaregio 873
Venice, 30121
Italy

HOME PAGE: http://www.unive.it/persone/billio

Massimiliano Caporin

University of Padua - Department of Statistical Sciences ( email )

Via Battisti, 241
Padova, 35121
Italy

Lorenzo Frattarolo

European Commission-Joint Research Centre ( email )

Joint Research Centre, European Commission, Rue du
Brussels, Brussels 1050
Belgium

Loriana Pelizzon

Goethe University Frankfurt - Faculty of Economics and Business Administration ( email )

Theodor-W.-Adorno-Platz 3
Frankfurt am Main, D-60323
Germany

Leibniz Institute for Financial Research SAFE ( email )

Theodor-W.-Adorno-Platz 3
Frankfurt am Main, 60323
Germany

HOME PAGE: http://www.safe-frankfurt.de

Ca Foscari University of Venice - Dipartimento di Economia ( email )

Cannaregio 873
Venice, 30121
Italy

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