Industry Characteristics and Financial Risk Spillovers

TL;DR

This paper introduces a new measure of tail risk spillover and demonstrates significant volatility and risk transmission from the financial sector to real economy sectors in the U.S., especially during crises.

Contribution

It develops a novel tail risk spillover measure and empirically shows its relevance in capturing financial-to-real economy risk transmission during crises.

Findings

Significant tail risk spillovers from finance to real sectors from 2001-2011

Spillovers increase during financial crises

Sectors with high external financing needs are more vulnerable

Abstract

This paper proposes a new measure of tail risk spillover. The empirical application provides evidence of significant volatility and tail risk spillovers from the financial sector to many real economy sectors in the U.S. economy in the period from 2001 to 2011. These spillovers increase in crisis periods. The conditional coexceedance in a given sector is positively related to its amount of debt financing, and negatively related to its relative valuation and investment. Real economy sectors which require substantial external financing, and whose value and investment activity are relatively lower, are prime candidates for depreciation in the wake of crisis in the financial sector.