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Financial and Macroeconomic Connectedness - A Network Approach to Measurement and Monitoring (Paperback)
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Financial and Macroeconomic Connectedness - A Network Approach to Measurement and Monitoring (Paperback)
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Connections among different assets, asset classes, portfolios, and
the stocks of individual institutions are critical in examining
financial markets. Interest in financial markets implies interest
in underlying macroeconomic fundamentals. In Financial and
Macroeconomic Connectedness, Frank Diebold and Kamil Yilmaz propose
a simple framework for defining, measuring, and monitoring
connectedness, which is central to finance and macroeconomics.
These measures of connectedness are theoretically rigorous yet
empirically relevant. The approach to connectedness proposed by the
authors is intimately related to the familiar econometric notion of
variance decomposition. The full set of variance decompositions
from vector auto-regressions produces the core of the
'connectedness table.' The connectedness table makes clear how one
can begin with the most disaggregated pair-wise directional
connectedness measures and aggregate them in various ways to obtain
total connectedness measures. The authors also show that variance
decompositions define weighted, directed networks, so that these
proposed connectedness measures are intimately related to key
measures of connectedness used in the network literature. After
describing their methods in the first part of the book, the authors
proceed to characterize daily return and volatility connectedness
across major asset (stock, bond, foreign exchange and commodity)
markets as well as the financial institutions within the U.S. and
across countries since late 1990s. These specific measures of
volatility connectedness show that stock markets played a critical
role in spreading the volatility shocks from the U.S. to other
countries. Furthermore, while the return connectedness across stock
markets increased gradually over time the volatility connectedness
measures were subject to significant jumps during major crisis
events. This book examines not only financial connectedness, but
also real fundamental connectedness. In particular, the authors
show that global business cycle connectedness is economically
significant and time-varying, that the U.S. has disproportionately
high connectedness to others, and that pairwise country
connectedness is inversely related to bilateral trade surpluses.
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