Measuring the frequency dynamics of financial connectedness and systemic risk

By Jozef Baruník, Tomas Krehlik. 2015

1,583 citations recorded by the source corpus.

We propose a new framework for measuring connectedness among financial variables that arises due to heterogeneous frequency responses to shocks. To estimate connectedness in short-, medium-, and long-term financial cycles, we introduce a framework based on the spectral representation of variance decompositions. In an empirical application, we document the rich time-frequency dynamics of volatility connectedness in US financial institutions. Economically, periods in which connectedness is created at high frequencies are periods when stock markets seem to process information rapidly and calmly, and a shock to one asset in the system will have an impact mainly in the short term. When the connectedness is created at lower frequencies, it suggests that shocks are persistent and are being transmitted for longer periods.

Subfields: Economics and Econometrics, Finance

View Paper: https://www.semanticscholar.org/paper/cb76d7ed012318a51c91e3af471f4e89d1fa12a4

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Citations in the corpus

Connectedness of cryptocurrencies and prevailing uncertainties (2020, methodology): “We first apply the mechanism of connectedness measures by Baruník and Křehlík (2018) to quantify the level of connectedness.”
Volatility spillovers across global asset classes: Evidence from time and frequency domains (2018, background): “In all the previous cases, and considering that agents can focus on different investment horizons when they make investment decisions, the degree of connectedness among different markets will be different at different frequencies (Barunik and Krehlik, 2018).”
Frequency connectedness and cross-quantile dependence between green bond and green equity markets (2021, methodology): “…equity indexes experience an upward trend), January 2018–December 2019 (when the index values experience more pronounced 3The choice of the forecast horizon is based on the original approach in Baruńık & Křehĺık (2018), however, our results are robust to other choices of the forecast horizons.”