Dynamic structure of the US financial systems

Khaldoun Khashanah, Linyan Miao

Research output: Contribution to journalArticlepeer-review

7 Scopus citations

Abstract

This paper empirically investigates the structural evolution of the US financial systems. It particularly aims to explore if the structure of the financial systems changes when the economy enters a recession. The empirical analysis is conducted through the statistical approach of principal components analysis (PCA) and the graph theoretic approach of minimum spanning trees (MSTs). The PCA results suggest that the VIX was the dominant factor influencing the financial system prior to the recession; however, the monetary policy represented by the three-month T-bill yield became the leading factor in the system during the recession. By analyzing the MSTs, we find evidence that the structure of the financial system during the economic recession is substantially different from that during the period of economic expansion. Moreover, we discover that the financial markets are more integrated during the economic recession. The much stronger integration of the financial system was found to start right before the advent of the recession. Research findings will help individuals, institutions, regulators, central bankers better understand the market structure under the economic turmoil, so more efficient strategies can be used to minimize the systemic risk. This study compares the structure of the US financial markets in economic expansion and contraction periods. The structural dynamics of the financial system are explored, focusing on the recent economic recession triggered by the US subprime mortgage crisis. We introduce a new systemic risk measure.

Original languageEnglish
Pages (from-to)321-339
Number of pages19
JournalStudies in Economics and Finance
Volume28
Issue number4
DOIs
StatePublished - 4 Oct 2011

Keywords

  • Financial systems
  • Minimum spanning tree
  • Principal components analysis
  • Recession
  • System of systems
  • United States of America

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