This paper replicates the Diebold and Yilmaz (2012) study on the connectedness ofthe commodity market and three other financial markets: the stock market, the bond market, and the FX market, based on the Generalized Forecast Error Variance Decomposition, GEFVD. We show that the net spillover indices (of directional connectedness), used to assess the net contribution of one market to overall risk in the system, are sensitive to the normalization scheme applied to the GEFVD. We show that, considering data generating processes characterized by different degrees of persistence and covariance, a scalarbased normalization of the Generalized Forecast Error Variance Decomposition is preferable to the row normalization suggested by Diebold and Yilmaz since it yields net spillovers free of sign and ranking errors.

How do normalization schemes affect net spillovers? A replication of the Diebold and Yilmaz (2012) study / Giuseppe Caloia, Francesco; Cipollini, Andrea; Muzzioli, Silvia. - In: ENERGY ECONOMICS. - ISSN 1873-6181. - 84:104536(2019), pp. 1-13. [10.1016/j.eneco.2019.104536]

How do normalization schemes affect net spillovers? A replication of the Diebold and Yilmaz (2012) study

Silvia Muzzioli
2019

Abstract

This paper replicates the Diebold and Yilmaz (2012) study on the connectedness ofthe commodity market and three other financial markets: the stock market, the bond market, and the FX market, based on the Generalized Forecast Error Variance Decomposition, GEFVD. We show that the net spillover indices (of directional connectedness), used to assess the net contribution of one market to overall risk in the system, are sensitive to the normalization scheme applied to the GEFVD. We show that, considering data generating processes characterized by different degrees of persistence and covariance, a scalarbased normalization of the Generalized Forecast Error Variance Decomposition is preferable to the row normalization suggested by Diebold and Yilmaz since it yields net spillovers free of sign and ranking errors.
2019
23-ott-2019
84
104536
1
13
How do normalization schemes affect net spillovers? A replication of the Diebold and Yilmaz (2012) study / Giuseppe Caloia, Francesco; Cipollini, Andrea; Muzzioli, Silvia. - In: ENERGY ECONOMICS. - ISSN 1873-6181. - 84:104536(2019), pp. 1-13. [10.1016/j.eneco.2019.104536]
Giuseppe Caloia, Francesco; Cipollini, Andrea; Muzzioli, Silvia
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Utilizza questo identificativo per citare o creare un link a questo documento: https://hdl.handle.net/11380/1187638
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