SAFE working paper
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- Sustainable Architecture for Finance in Europe (SAFE) (11) (remove)
225
We propose a spatiotemporal approach for modeling risk spillovers using time-varying proximity matrices based on observable financial networks and introduce a new bilateral specification. We study covariance stationarity and identification of the model, and analyze consistency and asymptotic normality of the quasi-maximum-likelihood estimator. We show how to isolate risk channels and we discuss how to compute target exposure able to reduce system variance. An empirical analysis on Euro-area cross-country holdings shows that Italy and Ireland are key players in spreading risk, France and Portugal are the major risk receivers, and we uncover Spain's non-trivial role as risk middleman.