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Detecting Statistically Significant Changes in Connectedness: A Bootstrap-based Technique

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  • Matthew Greenwood-Nimmo
  • Evzen Kocenda
  • Viet Hoang Nguyen

Abstract

Connectedness quantifies the extent of interlinkages within economies or markets based on a network approach. Connectedness is measured by the Diebold-Yilmaz spillover index, and abrupt increases in this measure are thought to result from major events. However, formal statistical evidence of events causing such increases is scant. We develop a bootstrap-based technique to evaluate the probability that the value of the spillover index changes at a statistically significant level following an exogenously deï¬ ned event. We further show how our procedure can detect the dates of unknown events endogenously. The results of a simulation exercise support the effectiveness of our method. We revisit the original dataset from Diebold and Yilmaz’s seminal work and obtain statistical support that the spillover index increases quickly in the wake of adverse shocks. Our methodology accounts for small sample bias and is robust with respect to modifications of the pre-event period and forecast horizon.

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  • Matthew Greenwood-Nimmo & Evzen Kocenda & Viet Hoang Nguyen, 2024. "Detecting Statistically Significant Changes in Connectedness: A Bootstrap-based Technique," CAMA Working Papers 2024-51, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
  • Handle: RePEc:een:camaaa:2024-51
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    1. Albrecht, Peter & Kočenda, Evžen, 2024. "Volatility connectedness on the central European forex markets," International Review of Financial Analysis, Elsevier, vol. 93(C).

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    More about this item

    Keywords

    connectedness; spillover index; adverse shocks; impactful events; financial contagion; bootstrap-after-bootstrap procedure;
    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
    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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