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Banking Crisis And Cyclic Shocks: A Perspective On Volatility Clustering

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  • Mingyuan Sun

Abstract

Typical systemic risk measurement barely captures the dynamic risk characteristics of the entire banking system. Experience from past financial crises shows, major indicators in financial markets have clustered volatility during periods of economic downturns. This study focuses on the overall profile of the commercial banking sector. The Ratio of Adjusted Weighted Estimated Loss is introduced as an indicator of banking crisis to analyze volatility clustering in a system-wide perspective. The results show that crises indicator volatility tends to cluster together when distress signals begin to appear in the market. A leverage effect is also presented in the results when applying the EGARCH model. Analysis of the effect of cyclic shocks discusses the process of risk transfer from exogenous shocks to endogenous contagion. The results have implications for a better understanding of the relationship between business cycle and banking crises

Suggested Citation

  • Mingyuan Sun, 2018. "Banking Crisis And Cyclic Shocks: A Perspective On Volatility Clustering," The International Journal of Business and Finance Research, The Institute for Business and Finance Research, vol. 12(2), pages 49-61.
    • Handle: RePEc:ibf:ijbfre:v:12:y:2018:i:2:p:49-61
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    More about this item

    Keywords

    EGARCH; Volatility Clustering; Cyclic Shocks; Leverage Effect;
    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
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • G01 - Financial Economics - - General - - - Financial Crises
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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