(RP101) Bank Volatility Connectedness in The SEACEN Region

Publish Date: : May 2017Author: : Kamil Yilmaz : : Total Downloads : 201

The global fnancial crisis of 2008-09 struck the modern capitalist system like no other in recent history. It affected many countries and markets around the world, leading to global recession in 2009. Financial institutions played a key role in the evolution of the global fnancial crisis. Disproportionate risks taken by big fnancial institutions have, over time, caused serious challenges for the whole fnancial system.

News about the problems of a major bank led investors to flee the stocks of that bank frst, followed by the stocks of other banks in the economy. Furthermore, depending on the size of the banking system and its fnancial connectedness with banks in other economies, news about the troubles of the banking system in a single economy forced investors to flee from banking sector stocks, not only in that economy, but in other economies of the region as well. In view of this, banking stocks are connected not only within one economy but across economies.
Financial centers around the world were affected by the US and European fnancial crises. The SEACEN region was no exception. This study applied the Diebold-Yilmaz Connectedness Index methodology to major SEACEN bank stock return volatilities to analyze the bank volatility connectedness in the region during the period from 2004 to 2016. The results provide important insights into the behavior of the region’s major bank stocks over time. First, economy-level clusters in the banking volatility network are identifed. Second, the volatility connectedness of the SEACEN banks increased signifcantly when the US and European fnancial crises hit the worldwide fnancial markets. During systemic events, the region’s bank volatility network becomes tighter with banks
from different economies of the region generating volatility connectedness to others. When included in the analysis, along with the major Australian
and Japanese banks, the global systemically important banks (GSIBs) from the US and Europe generate substantial volatility connectedness to
SEACEN banks.

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