Seminar: 2025-02-26 Luca Margaritella

Topic Decomposing Global Bank Network Connectedness: What is Common, Idiosyncratic and When?

Abstract We propose a novel approach to estimate high-dimensional global bank network connectedness in both the time and frequency domains. By employing a factor model with sparse VAR idiosyncratic components, we decompose system-wide connectedness (SWC) into two key drivers: (i) common component shocks and (ii) idiosyncratic shocks. We also provide bootstrap confidence bands for all SWC measures. Furthermore, spectral density estimation allows us to disentangle SWC into short-, medium-, and long-term frequency responses to these shocks. We apply our methodology to two datasets of daily stock price volatilities for over 90 global banks, spanning the periods 2003-2013 and 2014-2023. Our empirical analysis reveals that SWC spikes during global crises, primarily driven by common component shocks and their short-term effects. Conversely, in normal times, SWC is largely influenced by idiosyncratic shocks and medium-term dynamics.