Modeling Systemic Risk with Markov Switching Graphical SUR Models

49 Pages Posted: 14 Dec 2014 Last revised: 26 Dec 2019

See all articles by Daniele Bianchi

Daniele Bianchi

School of Economics and Finance, Queen Mary University of London

Monica Billio

Ca Foscari University of Venice - Dipartimento di Economia

Roberto Casarin

University Ca' Foscari of Venice - Department of Economics

Massimo Guidolin

Bocconi University - Department of Finance

Date Written: June 19, 2015

Abstract

We propose a Markov Switching Graphical Seemingly Unrelated Regression (MS-GSUR) model to investigate time-varying systemic risk based on a range of multi-factor asset pricing models. Methodologically, we develop a Markov Chain Monte Carlo (MCMC) scheme in which latent states are identified on the basis of a novel weighted eigenvector centrality measure. An empirical application to the S&P100 constituents shows that cross-firm connectivity significantly increased over the period 1999-2003 and the financial crisis of 2008-2009. Finally, we provide evidence that firm-level centrality does not correlate with market values and is instead positively linked to realized financial losses.

Keywords: Markov Regime-Switching, Weighted Eigenvector Centrality, Graphical Models, MCMC, Systemic Risk, Network Connectivity

JEL Classification: C11, C15, C32, C58

Suggested Citation

Bianchi, Daniele and Billio, Monica and Casarin, Roberto and Guidolin, Massimo, Modeling Systemic Risk with Markov Switching Graphical SUR Models (June 19, 2015). WBS Finance Group Research Paper No. 227, Available at SSRN: https://ssrn.com/abstract=2537986 or http://dx.doi.org/10.2139/ssrn.2537986

Daniele Bianchi (Contact Author)

School of Economics and Finance, Queen Mary University of London ( email )

Mile End Road
London, London E1 4NS
United Kingdom

HOME PAGE: http://whitesphd.com

Monica Billio

Ca Foscari University of Venice - Dipartimento di Economia ( email )

Cannaregio 873
Venice, 30121
Italy

HOME PAGE: http://www.unive.it/persone/billio

Roberto Casarin

University Ca' Foscari of Venice - Department of Economics ( email )

San Giobbe 873/b
Venice, 30121
Italy
+39 030.298.91.49 (Phone)
+39 030.298.88.37 (Fax)

HOME PAGE: http://sites.google.com/view/robertocasarin

Massimo Guidolin

Bocconi University - Department of Finance ( email )

Via Roentgen 1
Milano, MI 20136
Italy

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