We propose a measure of the extent to which a financial sector is connected to the real economy. The Measure of Connectedness is the share of credit market instruments represented by claims whose direct counterpart belongs to the non-financial sectors. The aggregate U.S. Measure of Connectedness...

In this paper we study the selection of the number of primitive shocks in exact and approximate factor models in the presence of structural instability. The empirical analysis shows that the estimated number of factors varies substantially across several selection methods and over the last 30...

We examine the dynamic effects of credit shocks using a large data set of U.S. economic and financial indicators in a structural factor model. The identified credit shocks, interpreted as unexpected deteriorations of credit market conditions, immediately increase credit spreads, decrease rates...

We propose a measure of the extent to which a financial sector is connected to the real economy. The Measure of Connectedness is a mesure of composition of the assets, namely the share of the credit to the non-financial sectors over the total credit market instruments. The aggregate U.S. Measure...

The recent crisis has revealed the potentially dramatic consequences of allowing the build-up of an overstretched leverage of the financial system, and prompted proposals by bank supervisors to significantly tighten bank capital requirements as part of the new Basel 3 regulations. Although these...

This paper proposes an approach to measure the extent of nonlinearity of the exposure of a financial asset to a given risk factor. The proposed measure exploits the decomposition of a conditional expectation into its linear and nonlinear components. We illustrate the method with the measurement...

A "curse of dimensionality" arises when one tries to use the GMM based on a continuum of moments conditions to estimate a high dimensional multivariate model. The solution proposed consists of converting the high dimensional model into a continuum of auxiliary univariate models. An indirect...