Network Banks Exposures and Variance Spillovers in the Euro Area

Project Start:01/2016
Status:Completed
Researchers:Monica Billio, Massimiliano Caporin, Lorenzo Frattarolo, Aleksey Kolokolov, Loriana Pelizzon, Zorka Simon
Category: Financial Intermediation, Systemic Risk Lab
Funded by:LOEWE

We propose a new model of European equity volatility and volatility spillovers based not only on stock returns but also on balance sheet data on financial bank connectedness. The system of connections among banks is extracted from banks’ foreign exposures provided by the BIS consolidated banking statistics from 2000. We estimated volatility and volatility spillovers using a proximity structure Baba-Engle-Kraft-Kroner (BEKK) model where the proximity matrices are derived from the banks’ foreign exposures observed quarterly. This empirical investigation allows us to shed light on the role of banks´ foreign exposures on risk spillovers.

 

We propose a spatial approach to model risk spillovers using financial time-varying proximities based on actual claims among entities. We show how these methods could be useful in (i) isolating influential and fragile entities and important risk channels, (ii) investigating the role of portfolio composition in risk transfers, and (iii) computing target exposures able to reduce system volatility. Our empirical application uses banks’ foreign exposures as a proxy for the euro area cross-country holdings.

 

Related Working Papers

No.Author/sTitleYearProgram AreaKeywords
225Monica Billio, Massimiliano Caporin, Lorenzo Frattarolo, Loriana PelizzonNetworks in Risk Spillovers: A Multivariate GARCH Perspective2018 Financial Intermediation, Systemic Risk Lab spatial GARCH; network; risk spillover; nancial spillover
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