Signed Spillover Effects Building on Historical Decompositions

53 Pages Posted: 29 Aug 2017

See all articles by Mardi H. Dungey

Mardi H. Dungey

University of Tasmania (deceased); Financial Research Network (FIRN) (deceased)

John Harvey

Tasmanian School of Business and Economics, University of Tasmania

Pierre L. Siklos

Wilfrid Laurier University - School of Business & Economics; Balsillie school of international affairs

Vladimir Volkov

University of Tasmania

Date Written: August 27, 2017

Abstract

The spillover effects of interconnectedness between financial assets are decomposed into both sources of shocks and whether they amplify or dampen volatility conditions in the target market. We use historical decompositions to rearrange information from a VAR which includes sources, direction and signs of effects building on the unsigned forecast error variance decomposition approach of Diebold and Yilmaz (2009). A spillover index based on historical decompositions has simple asymptotic properties, permitting the derivation of analytical standard errors of the index and its components. We apply the methodology to a panel of CDS spreads of sovereigns and financial institutions for the period 2003-2013 and identify how these entities contribute to global systemic risk.

Keywords: Historical decomposition, DY Spillover, Granger Causality, Networks

JEL Classification: C32, C51, C52, G10

Suggested Citation

Dungey, Mardi H. and Harvey, John and Siklos, Pierre L. and Volkov, Vladimir, Signed Spillover Effects Building on Historical Decompositions (August 27, 2017). CAMA Working Paper No. 52/2017, Available at SSRN: https://ssrn.com/abstract=3027818 or http://dx.doi.org/10.2139/ssrn.3027818

Mardi H. Dungey (Contact Author)

University of Tasmania (deceased)

Financial Research Network (FIRN) (deceased)

John Harvey

Tasmanian School of Business and Economics, University of Tasmania ( email )

Locked Bag 1317
Launceston, 7250
Australia

Pierre L. Siklos

Wilfrid Laurier University - School of Business & Economics ( email )

Department of Economics
75 University Avenue W.
Waterloo, Ontario N2L 3C5
Canada
519-884-0710 Ext.. 3491 (Phone)

HOME PAGE: http://pierrelsiklos.com

Balsillie school of international affairs ( email )

67 Erb Street West
Waterloo, ON N2L 6C2
Canada

Vladimir Volkov

University of Tasmania ( email )

French Street
Sandy Bay
Tasmania, 7250
Australia

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