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Connectedness in the global banking market network: Implications for risk management and financial policy

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  • Muñoz Mendoza, Jorge A.
  • Veloso Ramos, Carmen L.
  • Delgado Fuentealba, Carlos L.
  • Araya Gómez, Iván E.
  • Sepúlveda Yelpo, Sandra M.
  • Cornejo Saavedra, Edinson E.

Abstract

Previous studies have analyzed the banking market connectedness using aggregate indices or a small sample of banks but ignore that the linkages may be affected by systemic and idiosyncratic factors. We analyze the connectedness between 205 banks from 42 countries between January 02, 2007, and December 29, 2023. Using a two-step approach, we first removed common global factors from the banking stock volatility, and then we use the LASSO-VAR model to estimate the bank stock markets network as a high-dimensional system. Our results reveal that the unobservable common global factors of banking stock volatility act as a systemic vehicle that amplifies shocks. We identify the markets and banks that offer significant advantages to diversifying risk, and those that transmit the largest idiosyncratic spillovers and induce financial contagion within the network. These results have important implications for investment decision-making and policymakers.

Suggested Citation

  • Muñoz Mendoza, Jorge A. & Veloso Ramos, Carmen L. & Delgado Fuentealba, Carlos L. & Araya Gómez, Iván E. & Sepúlveda Yelpo, Sandra M. & Cornejo Saavedra, Edinson E., 2024. "Connectedness in the global banking market network: Implications for risk management and financial policy," International Review of Financial Analysis, Elsevier, vol. 95(PB).
    • Handle: RePEc:eee:finana:v:95:y:2024:i:pb:s1057521924004022
    DOI: 10.1016/j.irfa.2024.103470
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    More about this item

    Keywords

    Banking; Spillovers; Connectedness; Network; Risk;
    All these keywords.

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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