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Spillover Effects among Financial Institutions: A State-Dependent Sensitivity Value-at-Risk Approach

Published online by Cambridge University Press:  30 May 2014

Zeno Adams ,
Roland Füss  and
Reint Gropp
Zeno Adams
Affiliation:
zeno.adams@unisg.ch, Swiss Institute of Banking and Finance, University of St. Gallen, Rosenbergstrasse 52, 9000 St. Gallen, Switzerland
Roland Füss
Affiliation:
roland.fuess@unisg.ch, Swiss Institute of Banking and Finance, University of St. Gallen, Rosenbergstrasse 52, 9000 St. Gallen, Switzerland
Reint Gropp
Affiliation:
reint.gropp@hof.uni-frankfurt.de, House of Finance, Goethe University Frankfurt, Grüneburgplatz 1, 60323 Frankfurt, Germany.
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Abstract

In this paper, we develop a state-dependent sensitivity value-at-risk (SDSVaR) approach that enables us to quantify the direction, size, and duration of risk spillovers among financial institutions as a function of the state of financial markets (tranquil, normal, and volatile). For four sets of major financial institutions (commercial banks, investment banks, hedge funds, and insurance companies), we show that while small during normal times, equivalent shocks lead to considerable spillover effects in volatile market periods. Commercial banks and, especially, hedge funds appear to play a major role in the transmission of shocks to other financial institutions.

Type
Research Articles
Information
Journal of Financial and Quantitative Analysis , Volume 49 , Issue 3 , June 2014 , pp. 575 - 598
Copyright
Copyright © Michael G. Foster School of Business, University of Washington 2014 

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