Can market connections be used to predict financial crises?
Policy makers, regulators and practitioners understand the central role of ‘connectedness’ between financial firms and markets and its importance in modern risk measurement and management encompassing areas such as counter-party and gridlock risk, market,
Policy makers, regulators and practitioners understand the central role of ‘connectedness’ between financial firms and markets and its importance in modern risk measurement and management encompassing areas such as counter-party and gridlock risk, market, credit and systemic risks. The global financial crisis highlighted the need for crisis prediction models to aid policy makers and regulators to preemptively manage the financial services sector and the wider economy. Successive financial crisis remind us of the catastrophic economic and personal impact of economic mismanagement and the benefits from improving crises prediction models. An international research team, which included Professor Philip Hamill from Abu Dhabi University, take theoretical motivation from network theory and investigate how financial connections between European sovereign bond markets transmit risk. They quantify total systemic risk in the network and the flow of risk between bond markets over the period encompassing the global financial crisis which was exacerbated by the European sovereign debt crisis. The research also provides an evaluation of a range of crisis prediction methodologies and makes concrete recommendations for using the most appropriate econometric techniques which can lead to earlier detection, and policy intervention, to mitigate the impact of a financial crisis. Professor Hamill commented "This is a important research area which has benefited from relatively limited research to-date using the methodologies employed in this comprehensive study. The importance of this work cannot be underestimated as we all understand the impact of financial crises and the need to promote sustained economic growth supporting the United Nations sustainable development goal 8 promoting decent work and economic growth.".
Hamill. P. A., Y. Li., A. Pantelous, J. Waterworth, S. Vigne and J. Waterworth. (2021). Was a deterioration in ‘connectedness’ a leading indicator of the European sovereign debt crisis, Journal of International Financial Markets, Institutions and Money. https://doi.org/10.1016/j.intfin.2021.101300
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