Network Connectivity, Systemic and Systematic Risk

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

The project aims to shed light on understanding the propagation mechanisms behind the recent financial crisis. Part of the literature postulates that systemic risk is strictly related (if not equal to) systematic risk. In this extension, we will elaborate on this hypothesis and introduce a modeling framework where systemic and systematic risks co-exist. The model is a simplification of the Branger et al. (2014) model and a variation of the traditional Capital Asset Pricing Model (CAPM) where networks are used to infer the exogenous/lagged and contemporaneous links across assets. The econometric approach used to estimate the model refers to the spatial econometric framework, namely the use of concentrated likelihoods. In our framework network, connections are exogenously provided by direct exposures and indirect exposures.

 

The project has allowed extending the classic factor-based asset pricing model by including network linkages in linear factor models. We assume that the network linkages are exogenously provided. This extension of the model allows a better understanding of the causes of systematic risk.

 

Related Published Papers

Author/sTitleYearProgram AreaKeywords
Massimiliano Caporin, Aleksey Kolokolov, Roberto RenĂ²Systemic Co-Jumps
Journal of Financial Economics
2017 Financial Markets, Systemic Risk Lab Jumps; Return predictability; Systemic events; Variance risk premium

Related Working Papers

No.Author/sTitleYearProgram AreaKeywords
228Roberto PanzicaIdiosyncratic Volatility Puzzle: The Role of Assets' Interconnections2018 Financial Markets, Systemic Risk Lab Idiosyncratic volatility puzzle; Networks; Expected Returns; Granger Causality
149Massimiliano Caporin, Aleksey Kolokolov, Roberto RenĂ²Systemic Co-Jumps2016 Financial Markets, Systemic Risk Lab Jumps, Return predictability, Systemic events, Variance Risk Premium
166Monica Billio, Massimiliano Caporin, Roberto Panzica, Loriana PelizzonThe Impact of Network Connectivity on Factor Exposures, Asset Pricing and Portfolio Diversification2016 Financial Markets, Systemic Risk Lab CAPM, volatility, network, interconnections, systematic risk
165Giovanni Bonaccolto, Massimiliano Caporin, Roberto PanzicaEstimation and Model-Based Combination of Causality Networks2017 Financial Markets, Systemic Risk Lab Granger causality, quantile causality, multi-layer network, network combination
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