Shock transmissions and business linkages among US sectors

Abstract

This paper examines the volatility spillovers between US industries and their dependence on the inter-industry business linkages. Our first-stage multivariate model reveals significant volatility transmission between trading industries. Our second-stage results demonstrate that inter-industry spillovers are influenced by the strength of the trading relationship. When industries are more important to their partners, as measured by the shares of inputs or revenue, they tend to have stronger volatility spillovers toward their partners and are less affected by the volatility of their partners. Qualitatively similar results are obtained regardless of the business-linkages measures used and from samples restricted to closely-linked or to non-financial industries. Importantly, business linkages are highly relevant for shock spillovers in bad market conditions. The link between volatility spillovers and the strength of the business relationship is confirmed at the portfolio level as well.

Keywords: Asset pricing, Stock market, Shock transmission, Variance decomposition, Connectedness, Input–output linkage

JEL Classification: C30, E16, E44, G11, G12