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

Ca Foscari University of Venice - Dipartimento di Economia

Loriana Pelizzon

Goethe University Frankfurt - Faculty of Economics and Business Administration

Multiple version iconThere are 2 versions of this paper

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
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+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

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

Cannaregio 873
Venice, 30121
Italy

Loriana Pelizzon

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

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

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