Download this Paper Open PDF in Browser

A System-Wide Approach to Measure Connectivity in the Financial Sector

62 Pages Posted: 11 Aug 2016 Last revised: 20 Apr 2017

Sumanta Basu

Cornell University

Sreyoshi Das

University of Michigan at Ann Arbor - Department of Economics

George Michailidis

University of Michigan at Ann Arbor

Amiyatosh K. Purnanandam

University of Michigan, Stephen M. Ross School of Business

Date Written: April 19, 2017

Abstract

We introduce and estimate a model that leverages a system-wide approach to identify systemically important financial institutions. It is based on a recently developed Lasso penalized Vector Auto-regressive (LVAR) model, that exhibits desirable statistical properties and enables us to detect systemic events and key institutions associated with them. The model explicitly allows for the possibility of connectivity amongst all institutions under consideration: this is in sharp contrast with extant measures of systemic risk that, either explicitly or implicitly, estimate such connections using pair-wise relationships between institutions. Using simulations we show that our approach can provide considerable improvement over extant measures in detecting systemically important institutions. Finally, we estimate our model for large financial institutions in the U.S. and show its usefulness in detecting systemically stressful periods and institution with real data.

Keywords: Systemic Risk, Financial Networks, Lasso, Vector Autoregression

JEL Classification: C58, G01, G29

Suggested Citation

Basu, Sumanta and Das, Sreyoshi and Michailidis, George and Purnanandam, Amiyatosh K., A System-Wide Approach to Measure Connectivity in the Financial Sector (April 19, 2017). Available at SSRN: https://ssrn.com/abstract=2816137 or http://dx.doi.org/10.2139/ssrn.2816137

Sumanta Basu (Contact Author)

Cornell University ( email )

Ithaca, NY 14853
United States

Sreyoshi Das

University of Michigan at Ann Arbor - Department of Economics ( email )

611 Tappan Street
Ann Arbor, MI 48109-1220
United States

George Michailidis

University of Michigan at Ann Arbor ( email )

500 S. State Street
Ann Arbor, MI 48109
United States

Amiyatosh K. Purnanandam

University of Michigan, Stephen M. Ross School of Business ( email )

701 Tappan Street
Ann Arbor, MI MI 48109
United States

Paper statistics

Downloads
179
Rank
141,849
Abstract Views
599