Persistence in Financial Connectedness and Systemic Risk

Abstract

This paper characterises dynamic linkages arising from shocks with heterogeneous degrees of persistence. Using frequency domain techniques, we introduce measures that identify smoothly varying links of a transitory and persistent nature. Our approach allows us to test for statistical differences in such dynamic links. We document substantial differences in transitory and persistent linkages among US financial industry volatilities, argue that they track heterogeneously persistent sources of systemic risk, and thus may serve as a useful tool for market participants.