Relation between regional uncertainty spillovers in the global banking system

TL;DR

This paper analyzes time-varying uncertainty spillovers among North American, EU, and ASEAN banking systems using improved network connectedness measures, revealing significant causal relationships and regional influence patterns over a decade.

Contribution

It introduces an enhanced method combining exponentially weighted returns and ridge regularization to better quantify regional banking uncertainty spillovers.

Findings

Uncertainty patterns are similar across regions with peaks during exogenous events.

North American banking system significantly influences EU and ASEAN systems.

Uncertainty spillovers are dynamically changing over time with identifiable peaks.

Abstract

We report on time-varying network connectedness within three banking systems: North America, the EU, and ASEAN. The original method by Diebold and Yilmaz is improved by using exponentially weighted daily returns and ridge regularization on vector autoregression (VAR) and forecast error variance decomposition (FEVD). We compute the total network connectedness for each of the three banking systems, which quantifies regional uncertainty. Results over rolling windows of 300 days during the period between 2005 and 2015 reveal changing uncertainty patterns which are similar across regions, with common peaks associated with identifiable exogenous events. Lead-lag relationships among changes of total network connectedness of the three systems, quantified by transfer entropy, reveal that uncertainties in the three regional systems are significantly causally related, with the North American system having the largest influence on EU and ASEAN.