Quantile Connectedness: Modelling Tail Behaviour in the Topology of Financial Networks

48 Pages Posted: 24 Apr 2018

See all articles by Tomohiro Ando

Tomohiro Ando

University of Melbourne - Melbourne Business School

Matthew Greenwood-Nimmo

University of Melbourne; Australian National University (ANU) - Centre for Applied Macroeconomic Analysis (CAMA)

Yongcheol Shin

University of York (UK) - Department of Economics and Related Studies

Date Written: April 18, 2018

Abstract

We develop a new technique to estimate vector autoregressions by quantile regression. A factor structure is used to remove cross-section correlation in the residuals such that the system can be estimated on an equation-by-equation basis using existing quantile regression toolboxes. We use our model to study credit risk spillovers among a panel of 18 sovereigns and their respective financial sectors between January 2006 and February 2012. We show that idiosyncratic credit risk shocks do not propagate strongly at the median but that powerful spillovers occur in both tails. Furthermore, rolling sample analysis reveals marked time-varying tail-dependence. These important features of credit risk transmission are obscured in models estimated using conventional conditional mean estimators.

Keywords: Network Modelling, Quantile Vector Autoregression with Common Factors, Quantile Connectedness, Financial-Sovereign Credit Risk Transmission, Tail-Dependence

JEL Classification: C31, C32, C58, E44, G01

Suggested Citation

Ando, Tomohiro and Greenwood-Nimmo, Matthew and Shin, Yongcheol, Quantile Connectedness: Modelling Tail Behaviour in the Topology of Financial Networks (April 18, 2018). Available at SSRN: https://ssrn.com/abstract=3164772 or http://dx.doi.org/10.2139/ssrn.3164772

Tomohiro Ando

University of Melbourne - Melbourne Business School ( email )

200 Leicester Street
Carlton, Victoria 3053 3186
Australia

Matthew Greenwood-Nimmo (Contact Author)

University of Melbourne ( email )

185 Pelham Street
Carlton, Victoria 3053
Australia

Australian National University (ANU) - Centre for Applied Macroeconomic Analysis (CAMA) ( email )

ANU College of Business and Economics
Canberra, Australian Capital Territory 0200
Australia

Yongcheol Shin

University of York (UK) - Department of Economics and Related Studies ( email )

Heslington
York, YO1 5DD
United Kingdom

Register to save articles to
your library

Register

Paper statistics

Downloads
65
Abstract Views
340
rank
348,043
PlumX Metrics