Volatility spillover between economic sectors in financial crisis prediction: Evidence spanning the great financial crisis and Covid-19 pandemic
Volatility spillover between economic sectors in financial crisis prediction: Evidence spanning the great financial crisis and Covid-19 pandemic
This paper measures volatility spillovers between sectors of economic activity using network connectivity measures. Volatility spillovers are an accurate proxy for the transmission of risk across sectors and are particularly informative during crisis periods. To do this, we apply the novel methodology proposed in Diebold and Yilmaz (2012) to seven economic sectors of U.S. economic activity and find that Banking&Insurance, Energy, Technology and Biotechnology are the main channels through which shocks propagate to the rest of the economy. Banking&Insurance is especially relevant during the 2007–2009 global financial crisis while the Energy sector and Technology are especially relevant during the COVID-19 crisis. We also show that volatility spillovers exhibit ability to predict high episodes of volatility for the S&P 500 index being useful as early financial crisis indicators.
Covid-19, Financial crises, Random forest, S&P 500 volatility, Sectoral connectedness, Volatility spillovers
Laborda, Ricardo
c50eae59-9323-4cb0-a418-d51dd42c9986
Olmo, Jose
706f68c8-f991-4959-8245-6657a591056e
October 2021
Laborda, Ricardo
c50eae59-9323-4cb0-a418-d51dd42c9986
Olmo, Jose
706f68c8-f991-4959-8245-6657a591056e
Laborda, Ricardo and Olmo, Jose
(2021)
Volatility spillover between economic sectors in financial crisis prediction: Evidence spanning the great financial crisis and Covid-19 pandemic.
Research in International Business and Finance, 57, [101402].
(doi:10.1016/j.ribaf.2021.101402).
Abstract
This paper measures volatility spillovers between sectors of economic activity using network connectivity measures. Volatility spillovers are an accurate proxy for the transmission of risk across sectors and are particularly informative during crisis periods. To do this, we apply the novel methodology proposed in Diebold and Yilmaz (2012) to seven economic sectors of U.S. economic activity and find that Banking&Insurance, Energy, Technology and Biotechnology are the main channels through which shocks propagate to the rest of the economy. Banking&Insurance is especially relevant during the 2007–2009 global financial crisis while the Energy sector and Technology are especially relevant during the COVID-19 crisis. We also show that volatility spillovers exhibit ability to predict high episodes of volatility for the S&P 500 index being useful as early financial crisis indicators.
Text
LabordaOlmov_revised_final
- Accepted Manuscript
More information
Accepted/In Press date: 11 February 2021
e-pub ahead of print date: 4 March 2021
Published date: October 2021
Additional Information:
Funding Information:
Ricardo Laborda acknowledges financial support from CREVALOR .
Funding Information:
Jose Olmo acknowledges financial support from Project PID2019−104326GB-I00 from Ministerio de Ciencia e Innovación and from Fundación Agencia Aragonesa para la Investigación y el Desarrollo (ARAID) .
Publisher Copyright:
© 2021 Elsevier B.V.
Keywords:
Covid-19, Financial crises, Random forest, S&P 500 volatility, Sectoral connectedness, Volatility spillovers
Identifiers
Local EPrints ID: 447729
URI: http://eprints.soton.ac.uk/id/eprint/447729
ISSN: 0275-5319
PURE UUID: 68a2d848-b735-45f4-b33a-9747082ee918
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Date deposited: 19 Mar 2021 17:30
Last modified: 17 Mar 2024 06:24
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Author:
Ricardo Laborda
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