Financial and Macroeconomic Connectedness

Financial and Macroeconomic Connectedness

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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.The Global Share is the combined market capitalization share of the 10 stock markets in the 52a€“member World Federation of Exchanges. The underlying data are daily nominal localcurrency stock market indexes, from January 1994 to June 2013, taken from Yahoo Finance and Bloomberg. We calculate daily returns as the change in daily log closing prices. When the market is closed on a particular day, we substitute the missing value with the previous daya#39;s return, if the majority of theanbsp;...


Title:Financial and Macroeconomic Connectedness
Author: Francis X. Diebold, Kamil Yilmaz
Publisher:Oxford University Press - 2015-02-03
ISBN-13:

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