Financial and Macroeconomic Connectedness: A Network Approach to Measurement and Monitoring by Francis X. Diebold

Financial and Macroeconomic Connectedness: A Network Approach to Measurement and Monitoring

byFrancis X. Diebold, Kamil Yilmaz

Paperback | March 17, 2015

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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, FrankDiebold 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 onecan 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 areintimately 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 late1990s. 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 connectednessmeasures 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 pairwisecountry connectedness is inversely related to bilateral trade surpluses.

About The Author

Francis X. Diebold is Paul F. and Warren S. Miller Professor of Economics, and Professor of Finance and Statistics, at the University of Pennsylvania and its Wharton School. He has published widely in econometrics, forecasting, finance, and macroeconomics, and he has served on the editorial boards of leading journals including Econome...

Details & Specs

Title:Financial and Macroeconomic Connectedness: A Network Approach to Measurement and MonitoringFormat:PaperbackDimensions:288 pages, 9.21 × 6.1 × 0.59 inPublished:March 17, 2015Publisher:Oxford University PressLanguage:English

The following ISBNs are associated with this title:

ISBN - 10:0199338302

ISBN - 13:9780199338306

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Extra Content

Table of Contents

1. Measuring and Monitoring Connectedness2. U.S. Asset Classes3. Major U.S. Financial Institutions4. Global Stock Markets5. Sovereign Bond Markets6. Foreign Exchange Markets7. Assets Across Countries8. Global Business Cycles

Editorial Reviews

"We live in a highly integrated world economy with much stronger cross-border connections today than any other time in history. We need to have a better grasp of these connections as they are now at the heart of everyday macroeconomics and finance. Diebold and Yilmaz provide a masterfulframework that greatly enhances our understanding of these connections. They also open new research avenues by showing practical applications of their framework in different contexts. And all of these make their book a classical reference on the topic." --Ayhan Kose, Director, Development Prospects Group, The World Bank