Spillover effects among financial institutions: a state-dependent sensitivity value-at-risk approach : [Version September 2012]

In this paper, we develop a state-dependent sensitivity value-at-risk (SDSVaR) approach that enables us to quantify the direction, size, and duration of risk spillovers among financial institutions as a function of the state of financial markets (tranquil, normal, and volatile). Within a system of quantile regressions for four sets of major financial institutions (commercial banks, investment banks, hedge funds, and insurance companies) we show that while small during normal times, equivalent shocks lead to considerable spillover effects in volatile market periods. Commercial banks and, especially, hedge funds appear to play a major role in the transmission of shocks to other financial institutions. Using daily data, we can trace out the spillover effects over time in a set of impulse response functions and find that they reach their peak after 10 to 15 days

Systemic Risk, Contagion, and State-Dependent Sensitivities in Value-at-Risk Estimation: Evidence from Hedge Funds

In this paper, we propose a state-dependent VaR (SDVaR) to estimate spill over effects among different financial institutions. We permit spill-over effects to change depending on the state of financial markets. We show that spill-over effects only exist during crisis periods; in calm times spill over effects tend to be zero. The results highlight that spill over probabilities that do not condition on the state of financial markets may substantially over- or understate the contribution of an asset class to systemic risk. Using this approach we show that hedge funds play a major role in the transmission of shocks to the other financial institutions

Spillover Effects among Financial Institutions: A State-Dependent Sensitivity Value-at-Risk Approach

In this paper, we develop a state-dependent sensitivity value-at-risk (SDSVaR) approach that enables us to quantify the direction, size, and duration of risk spillovers among financial institutions as a function of the state of financial markets (tranquil, normal, and volatile). For four sets of major financial institutions (commercial banks, investment banks, hedge funds, and insurance companies), we show that while small during normal times, equivalent shocks lead to considerable spillover effects in volatile market periods. Commercial banks and, especially, hedge funds appear to play a major role in the transmission of shocks to other financial institution

Financialization in Commodity Markets: Disentangling the Crisis from the Style Effect

In this paper, we show that large inflows into commodity investments, a recent phenomenon known as financialization, has changed the behavior and dependence structure between commodities and the general stock market. The common perception is that the increase in comovements is the result of distressed investors selling both assets during the 2007-2009 financial crisis. We show that financial distress alone cannot explain the size and persistence of comovements. Instead, we argue that commodities have become an investment style for institutional investors. Given that institutional investors continue to target funds into commodities, we predict spillovers between commodities and the stock market to remain high in the future