Title: Signed spillover effects building on historical decompositions
Authors: Pierre Siklos - Wilfrid Laurier University (Canada) [presenting]
Abstract: The spillover effects of interconnectedness between financial assets is decomposed into both sources of shocks and whether they amplify or dampen volatility conditions in the target market. We use historical decompositions to rearrange information from a VAR which includes sources, direction and signs of effects building on the unsigned forecast error variance decomposition approach. A spillover index based on historical decompositions has simple asymptotic properties, permitting the derivation of analytical standard errors of the index and its components. We apply the methodology to a panel of CDS spreads of sovereigns and financial institutions for the period 2003-2013 and are able to observe both the direction of spillovers and whether they amplify or dampen volatility in the target market.