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Modeling systemic risk with Markov switching graphical SUR models

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Bianchi, Daniele, Billio, Monica, Casarin, Roberto and Guidolin, Massimo (2019) Modeling systemic risk with Markov switching graphical SUR models. Journal of Econometrics, 210 (1). pp. 58-74. doi:10.1016/j.jeconom.2018.11.005

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Official URL: https://doi.org/10.1016/j.jeconom.2018.11.005

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Abstract

We propose a Markov Switching Graphical Seemingly Unrelated Regression (MS-GSUR) model to investigate time-varying systemic risk based on a range of multi-factor asset pricing models. Methodologically, we develop a Markov Chain Monte Carlo (MCMC) scheme in which latent states are identified on the basis of a novel weighted eigenvector centrality measure. An empirical application to the constituents of the S&P100 index shows that cross-firm connectivity significantly increased over the period 1999-2003 and during the financial crisis in 2008-2009. Finally, we provide evidence that firm-level centrality does not correlate with market values and it is instead positively linked to realized financial losses.

Item Type: Journal Article
Subjects: H Social Sciences > HB Economic Theory
Divisions: Faculty of Social Sciences > Warwick Business School > Finance Group
Faculty of Social Sciences > Warwick Business School
Library of Congress Subject Headings (LCSH): Risk -- Mathematical models -- European Union countries, Markov processes, Monte Carlo method
Journal or Publication Title: Journal of Econometrics
Publisher: Elsevier BV * North-Holland
ISSN: 0304-4076
Official Date: May 2019
Dates:
DateEvent
May 2019Published
12 November 2018Available
1 May 2018Accepted
Volume: 210
Number: 1
Page Range: pp. 58-74
DOI: 10.1016/j.jeconom.2018.11.005
Status: Peer Reviewed
Publication Status: Published
Access rights to Published version: Restricted or Subscription Access
RIOXX Funder/Project Grant:
Project/Grant IDRIOXX Funder NameFunder ID
SYRTO-SSH-2012-32027Seventh Framework Programmehttp://dx.doi.org/10.13039/100011102
Systemic RiskInstitut Europlace de FinanceUNSPECIFIED
MISURAItaly. Ministero dell'educazione nazionale http://viaf.org/viaf/150573269

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