Assessing sectoral connectedness : the case of the financial sector

Abstract

This paper aims to measures connectedness and volatility spillovers between the main financial market sectors in the US and Europe. This study looks at different aspects of connectedness, from pairwise to system wide, as well as measuring directional connectedness. This is done in order to understand the dynamic nature of connectedness within sectors to assess trends or patterns during times of volatility and times of tranquillity. The methodology adopted here is from the framework developed by Diebold and Yilmaz (2011), whereby daily stock data from the sample sectoral ETFs is utilised from the period of November 2006 to March 2024. Such timeframe captures the effects of the Global Financial Crisis in 2008 and the Covid-19 Pandemic in 2020. Such findings suggest that there is an element of connectedness between sectors throughout the whole period and increases during times of financial crises. Furthermore, the results show that cyclical sectors tend to have higher levels of pairwise connectedness and also tend to be either net transmitters or receivers of volatility within the system.