Networks in Risk Spillovers: A Multivariate GARCH Perspective

Goethe University Frankfurt - Faculty of Economics and Business Administration; Leibniz Institute for Financial Research SAFE; Ca Foscari University of Venice - Dipartimento di Economia

There are 3 versions of this paper

Date Written: June 30, 2020

Abstract

We propose a spatiotemporal approach for modeling risk spillovers using time-varying proximity matrices based on observable financial networks and introduce a new bilateral Multivariate GARCH specification. We study covariance stationarity and identification of the model, develop the quasi-maximum-likelihood estimator and analyze its consistency and asymptotic normality. We show how to isolate risk channels and we discuss how to compute target exposure able to reduce system variance. An empirical analysis on Euroarea bond data shows that Italy and Ireland are key players in spreading risk, France and Portugal are major risk receivers, and we uncover Spain's non-trivial role as risk middleman.

Keywords: Spatial GARCH, network, risk spillover, financial spillover

JEL Classification: C58, G10

Suggested Citation: Suggested Citation

Billio, Monica and Billio, Monica and Caporin, Massimiliano and Frattarolo, Lorenzo and Pelizzon, Loriana, Networks in Risk Spillovers: A Multivariate GARCH Perspective (June 30, 2020). Ca' Foscari University of Venice, Department of Economics Research Paper Series No. 16/2020, Available at SSRN: https://ssrn.com/abstract=3761879 or http://dx.doi.org/10.2139/ssrn.3761879