Spillover Effects among Financial Institutions : A State-Dependent Sensitivity Value-at-Risk (SDSVaR) Approach

In this paper, we propose a state-dependent sensitivity VaR (SDSVaR) to quantify the size and duration of risk spillovers among financial institutions. We permit spillover effects to change depending on the state of financial markets. We show that while small during calm times, equivalent shocks lead to considerable spillover effects in volatile market periods. The results highlight that estimates on spillover magnitudes that do not condition on the state of financial markets may substantially over- or understate spillover effects among a set of financial institutions. Using a TSLS related approach to control for endogeneity in a simultaneous equation system, we show that investment banks and, especially, hedge funds play a major role in the transmission of shocks to the other financial institutions