NetworkbanksexposuresandvariancespilloversintheEuroareaLorenzoFrattarolo

EuropeanGovernmentBondDynamicsandStabilityPolicies:TamingContagionRisksMatin Schüle

HuguesPirotteULB,NationalBankofBelgium,FinMetrics

SessiononNetworksandContagion

NetworkbanksexposuresandvariancespilloversintheEuroareaBillio,Caporin,Frattarolo,Pelizzon

Goals

§ Usefulnessofspatialapproachin» isolatinginfluentialandfragileentitiesandimportantriskchannels,

» investigatingtheroleofportfoliocomposition inrisktransfers,

» computingtargetexposuresabletoreduceforecastedsystemvariance

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Idea

§ Inclusionofanetworkmodelinthecalibrationofarisk-covarying model

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ProblemwithNetworkTheory…inFinance

§ Identificationissues» “thedetectionofspilloversgenerallylacksaneconomicintuition

associatedwiththefundamentaltransmissionchannelsmotivatingthepresenceofspillovers”

§ Remainingvery“macro”andnotdiggingenoughin“micro-economics”comprehension» Nodesandconnections.Muchemphasisonconnections, lessonthe

internalphenomenoninsidethenodesandthetypeofcontractdesignswehavethere.

§ Problemof“raising”semantics» Directvs.informationalcontagionà ifimportantforyou,restateit.

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Majorrecommendations/remarks(1)

§ Only33pages,pdfinterrupted,nofigures,noreferences.§ Who?/Positioning

» Youtakealotoftimetojustify“economicdistances”insteadofgeographicalones…thisisfundamentaltolinktospatialeconometricsbutobvioustoeconomists,evenmorewhenthepapersyoucitearealotrelatedtoyourself.Andpartofyouraudienceseemstobepolicymakers.

» Alotofeffortsinrepeatedlyjustifyingthat“... Intheclassicalspatialstatisticsandeconometricsliterature…”

§ What?» Makesurethepromisedobjectivesintheabstractaredulycovered.» ”economicdistance”:country,institutions,singleagentsà andsectors?» Differenceinmethods….butfocusalsoindifferenceofposisibilitiesinresults.

§ Sowhat?» “…byobtainingtargetexposuresthatifhypotheticallyenforcedbythe

regulatorbeforethesovereignbondcrisisofthesecondquarterof2010couldhavelimiteditsimpact.ӈ pleasedevelop.

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Majorrecommendations/remarks(2)

§ Semantics» “Afirstandimmediategeneralizationdifferentiating theuseof

spatialeconometrictoolsinfinance,asopposedtoeconomics,isthattheparametersarenotconstrainedtobescalars”.

§ Empiricalestimation» BISquarterlyclaimsarenotinterpolatedto“days”.Theyarestatic

duringthequarter.» “ifAreportaclaimwithBasacounterparty,investorsperceivestock

marketofAtobedependentonstockmarketBbyafunctionoftheclaimamountrelativetosomesizemagnitudeofB”(p24)

» Any“thematic”conclusionsarisingfrom3.1.2?» Correlationofyields…ofchangesinyields?Absolute,relative?» Tables:roughandwithoutcaptions,units?Givestheimpressionthat

thefocusisonthemodel,notwhatthedatameansreally…» Economictakeawayfrom“Wefirstnotetheleftandrightspatial

modeloutperformthediagonalmodel”?» RealinsightsonaparticularcaseforSovereignBonds.

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Minorrecommendations§ TheinterestinEuropestartedwithinterbanklendingandthebankingcrisis.§ (p1)

» Yourefrainfromusing“contagion”and“systemic”.Stillthisishowwecalltheminfinance…Varianceandcovariancespilloversisaneconometricsinterpretation.Andoneofyourjustifications isoneofyourpapers.ü Stillyoumentionthenclearlythatyoursismorerestrictive(turnitupsidedown)

§ (fartoomany)Spellingandgrammaticalmistakes(underlined inred)+…» Englishsentencestructure» Economically-defineddistanceà economicdistance?» Hyphens.» Singularandpluralformsaremixedup…

§ Revise» keywords…» Lengthyandrepeatednotions.Sentencesbecomeparagraphs.» SometimesgivestheimpressionthatitisallaboutrelaxingtheconstraintsofCaporin

&Paruolo (2015).» (p8):parametersofequations1&2unexplained.

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EuropeanGovernmentBondDynamicsandStabilityPolicies:TamingContagionRisksSchwendner,Schuele,Ott,&Hillebrand

Positioning

1) Focusonbondyieldcorrelations insteadoftime-lag-implyingspillovereffectsasasourceofcontagion.» correlationsofyieldchangesmoresensitive tochangesinshort-term

marketsentimentthanabsoluteyieldlevels» instantaneouscross-correlationsarestrongerthanautocorrelations

2) Correlationsdisplaypatternsexplainedbyrisk-relatedevents

3) Euroareaissegmented intocoreandperipherycountries» stabilizingeffectoftherescueprog.helpedreconnectperipheral

countrieswithcore.

4) Stablestatisticaldependenciesà stablerisk-reducingcross-hedgingofaEuroareabondportfolio

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Ideas

1) Usebondreturnsthroughyields2) Computecorrelationsandpartialcorrelationsovermoving

timewindows…usedforPCNs3) Directed linksthrough 𝑑":$ = 𝑑",(:$ ()",$

4) Boostrapped robustindicator5) And…implementation ofnoise-filteredinfluencenetworks!

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Majorremarks

§ Greatstory,avoidskillingaflywithabazooka.» Arealempiricalpaperwithagoodtimelineofeventsrestated» Data-intensive,butnotmethod-intensive.» Goodintroductiononthe“repricing ofperceivedsovereignrisk”andthe

structuralchangeinriskperception.» Excellentlinkbetweenfacts,empiricalevidence,reinterpretedand

confirmedthroughthePNCs.§ Improvements

» Explanationsofheatmaps» Asinp14,worthtorememberthatwhatweareextractingismarket

perceptionandinterlinkages orcontagionofperceptions.ü p20:“OurcorrelationanalysissuggeststhattheEFSFbondissueswerepriced

aspartofthe“core”blocoftheEuroareasovereigns…”vs.ü p20:“After2012,thesituationimprovedsubstantially.In2013and2014,the

rescueprogrammes proved tobeeffective”

§ (p16)Causalityissueexposed:takeadvantageofneg correlationsand/orcontributetoit

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Minorremarks

§ Writingisquiterefinedalready» Excellentlinktofinancialeconomics» Pacedexplanationforthefirstpartoncorrelationandpartial

correlations» Bootstrapping,noisefiltering,etc…, couldbemoreexplainedinthe

samestyle(accelerationintheexplanation)

§ Bond“yields”oryieldreturnsà bond“returns”» Maybesomeexplanationofwhynotusingdirtybondpricesinstead

§ Amixtureof» Showinganinterestingmethodology» Showingadetailedempiricalstudy.

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