Trans-Atlantic Equity Volatility Connectedness: U.S. and European Financial Institutions, 2004-2014
54 Pages Posted: 6 Oct 2015
Date Written: October 6, 2015
We characterize equity return volatility connectedness in the network of major American and European financial institutions, 2004-2014. Our methods enable precise characterization of the timing and evolution of key aspects of the financial crisis. First, we find that during 2007-2008 the direction of connectedness was clearly from the U.S. to Europe, but that connectedness became bi-directional starting in late 2008. Second, we find an unprecedented surge in directional connectedness from European to U.S. financial institutions in June 2011, consistent with massive deterioration in the health of EU financial institutions. Third, we identify particular institutions that played disproportionately important roles in generating connectedness during the U.S. and the European crises.
Keywords: Systemic risk, Network connectedness, Systemically important financial institutions, Vector autoregression, Variance decomposition
JEL Classification: C32, G21
Suggested Citation: Suggested Citation