Spillover Effects among Financial Institutions: A State-Dependent Sensitivity Value-at-Risk Approach

Journal of Financial and Quantitative Analysis, Vol. 49, Issue 3, pp. 575-598

Zeno Adams,
Roland Füss,
Reint Gropp
Research Area:
Systemic Risk Lab, Financial Intermediation
Jan 2014
Risk spillovers, state-dependent sensitivity value-at-risk (SDSVaR), quantile regression, financial institutions, hedge funds

In this paper, we develop a state-dependent sensitivity value-at-risk (SDSVaR) approach that enables us to quantify the direction, size, and duration of risk spillovers among financial institutions as a function of the state of financial markets (tranquil, normal, and volatile). For four sets of major financial institutions (commercial banks, investment banks, hedge funds, and insurance companies), we show that while small during normal times, equivalent shocks lead to considerable spillover effects in volatile market periods. Commercial banks and, especially, hedge funds appear to play a major role in the transmission of shocks to other financial institutions.

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