Trans-Atlantic Equity Volatility Connectedness: U.S. and European Financial Institutions, 2004-2014

54 Pages Posted: 6 Oct 2015

See all articles by Francis X. Diebold

Francis X. Diebold

University of Pennsylvania - Department of Economics; National Bureau of Economic Research (NBER)

Kamil Yilmaz

Koc University

Date Written: October 6, 2015

Abstract

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

Diebold, Francis X. and Yilmaz, Kamil, Trans-Atlantic Equity Volatility Connectedness: U.S. and European Financial Institutions, 2004-2014 (October 6, 2015). Jacobs Levy Equity Management Center for Quantitative Financial Research Paper, Available at SSRN: https://ssrn.com/abstract=3680198 or http://dx.doi.org/10.2139/ssrn.3680198

Francis X. Diebold (Contact Author)

University of Pennsylvania - Department of Economics ( email )

Ronald O. Perelman Center for Political Science
133 South 36th Street
Philadelphia, PA 19104-6297
United States
215-898-1507 (Phone)
215-573-4217 (Fax)

HOME PAGE: http://www.ssc.upenn.edu/~fdiebold/

National Bureau of Economic Research (NBER)

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Kamil Yilmaz

Koc University

Rumelifeneri Yolu
34450 Sar?yer
Istanbul, 34450
Turkey

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