Connectedness (German Edition)

Morgan and its stock ceased to be traded on May 30, On September 15, Lehman Brothers went bankrupt and dropped out of the stock market, and our sample, on September 17, As a result, from May 30 to September 17, , there are thirty-four, and from September 17 to December 31, there are thirty-three FIs in our sample.

Figure 3 plots total volatility connectedness over day rolling-sample windows. We prefer to work with a day rather than a day window size because of the high number of variables included in the VAR analysis. From a bird's-eye perspective, the total connectedness plot in Figure 3 has some revealing patterns.

The jump in May was a reaction to the Federal Open Market Committee's FOMC decision to increase the federal funds rate target in its meeting by 25 basis points as well as the announcement that there was room for another increase in its June meeting. The Fed's decision led to the unraveling of carry trade positions of many developed country investors in emerging market assets. Apparently, this led to a sell off in financial sector equities and an increase in volatility connectedness across the European and American FI stocks.

Dynamic total volatility connectedness with day rolling-sample window. The predictive horizon for the underlying variance decomposition is 12 days. Putting the episode aside, one can discern three major cycles in the total connectedness plot. The first one lasted longer than the others.

It started in June and followed the stages of the global financial crisis, all the way to mid The initial tremors of the subprime mortgage crisis were first felt at the end of February In a few days time, the index increased by five percentage points, but this was a temporary increase. Once the initial tremors of the subprime crisis led the way to the liquidity crisis in the summer of , the total volatility connectedness index increased from In the meantime, as the financial statements of the major U.

FIs were announced everyone including the Federal Reserve had become more and more aware of the serious trouble facing the U. As an acknowledgement of the troubles facing the financial sector, in an unscheduled meeting on January 22, , one week before its regularly scheduled meeting, the FOMC lowered the policy rate by 75 basis points to 3.

8 German words that are impossible to translate into English - The Local

It was the first time that the Fed has implemented such a large cut in a single move. The index jumped from ECB and other major central FIs followed suit. In March Bear Stearns moved to the center stage. On March 17, , J. Morgan acquired Bear Stearns with financial assistance from the Fed. Following the Bear Stearns operation markets calmed down until the end of the summer. Before the second major cycle the connectedness index went through two smaller cycles; one from mid-August to mid-November, the other from mid-November to the end of February The first one was due to the problems in the British banking sector.

The index went up by 3. The second smaller cycle was an outcome of the revelations about the Greek fiscal deficit and debt stock.

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As the new Greek government revealed that the government budget deficit and the debt stock was actually much higher than announced by the previous government, it became clear that the losses of the European FIs holding the Greek debt would mount to billions of euros.

Markets reacted and the volatility connectedness index moved up by 7 percentage points from mid-November to the end of December. The second major cycle resulted from the inaction among the European policymakers against the Greek sovereign debt crisis of late and early For more than five months, in part because of the German elections in early May, European institutions could not come up with a workable solution to the crisis. The index did not stay low for too long, thanks to the increased worries about the sovereign debt and banking problems in Italy and Spain, two EU members with sizable economies compared to the members that had problems before.

Toward the end of , the heated political debate about the U. While Republicans proposed spending cuts to control the budget deficit, Democrats wanted to increase taxes. As the two sides could not find a compromise solution, the automatic spending cuts were expected to take place by the year's turn. In this atmosphere, the connectedness index increased gradually by four percentage points. However, a last-minute deal was struck to provide a temporary solution before the end of the year, and the volatility in the stock market did not necessarily go up any further. However, the impact of this announcement on the U.

The connectedness index increased toward the end of and the end of due to the problems of some of the FIs with the authorities. In , some of the major global FIs were forced to pay billions of dollars in fines in several countries for fixing the Libor rates. As of the end of the sample, May 30 , the connectedness index is The index shows that the markets are calmer as of the end of May compared to the stormy period of — So far we have relied on the day rolling sample window estimation to obtain the connectedness index.

However, as emphasized before, the shape of the total connectedness plot in Figure 3 is sensitive to the sample window size. We now reduce the window size to days and plot the connectedness index in Figure 4. Even though the day volatility connectedness plot Figure 4 is based on only the data for twenty-eight FIs that are included in the analysis from the beginning to the end of the sample, it is very similar to Figure 3.

All three major cycles are discernable. Perhaps it includes further information in that the impact of the Fed's decision in May is clearly visible in Figure 4. Furthermore, the impact of the first tremors of the subprime crisis on the index is more visible when the day window is used. The index jumps by 7 percentage points in late February to early March Other major developments in the U. Furthermore, the other two major cycles in the index are also consistent with the ones obtained with a day sample window.

Finally, other minor cycles that started in mid, mid and end are also visible in the day connectedness plot. Rolling total volatility connectedness with day rolling-sample window. The dynamics of total connectedness provides one with a clear understanding of the financial market developments influencing the volatility connectedness across major U.

Keeping this analysis in the back of one's mind, it is now possible to focus on the dynamics of directional connectedness of the European and American FIs over time. We conduct the dynamic analysis of the total directional connectedness in two steps. First, we group the FIs on each side of the Atlantic and analyze the volatility connectedness of the FIs on the American side with the ones on the European side.

In the second step, we analyze the total volatility connectedness of some of the individual FIs vis-a-vis others. Figure 5 presents plots of total directional connectedness of FIs on both sides of the Atlantic. The upper panels a and b present the plots of volatility connectedness originating from the United States and Europe, respectively. The lower panel, on the other hand, brings together the directional connectedness from the United States to Europe and from Europe to the United States that appeared as dotted lines in the upper panels.

A connectedness analysis of German financial institutions during the financial crisis in 2008

Directional volatility connectedness across the Atlantic data for twenty-eight FIs. The rolling estimation window width is days, and the predictive horizon for the underlying variance decomposition is 12 days. Let us start with the lower panel. There are three important observations one can make. First of all, the total directional connectedness across the Atlantic was rather low to begin with: The Fed's decisions in May—June to increase its policy rate led the connectedness from the European to the U. During the subprime crisis, the connectedness of the U. First, at the end of February , the connectedness from the U.

Second, during the liquidity crisis of late-July, early-August days, the connectedness from the U. Third, after a brief drop the connectedness from the U. After reaching the peak in December , the connectedness of the U. Interestingly, the volatility connectedness from the U. Over the same period, there was no significant increase in the connectedness of the European FIs to the U.

It would therefore not be wrong to claim that in the build-up stages of the U. The high bidirectional volatility connectedness across the Atlantic following the Lehman's collapse was a clear sign of the U. Once the financial crisis turned into a global one, the troubles of the European FIs were magnified. While the connectedness from the European to the U.

FIs was increasing in the first quarter of , the connectedness from the U. FIs to their European counterparts was decreasing. In order to gauge the soundness of the U. Federal Reserve conducted FI stress tests in early Before the Fed announced the stress test results in early May , the directional connectedness of the U. While the test results were in general good for the whole U. With small fluctuations, the connectedness of the U. As they both declined in the first few months of , both directional indices increased again in the second quarter of following the EU's inability to put together a financial aid package that would help contain the Greek sovereign debt crisis.

Six months after the public learned that the Greek sovereign debt stock was actually much higher than previously known, the EU finally announced a halfhearted financial rescue package to deal with the Greek sovereign debt crisis a few days after the German local elections in May The within-connectedness of both the European and U. FIs solid black lines in the upper panels of Figure 5 a and b fluctuated rather smoothly over the period from to the first half of It climbed steadily during As the EU scrambled to put together a workable financial aid package for Greece, the sovereign debt and banking troubles continued to simmer in other members of the EU.

In two months time it was Portugal's turn. After Portugal, the focus shifted to the fiscal balances and banking sectors of two important members of the EU; namely, Italy and Spain. As the worries about the Spanish and Italian banking and sovereign debt problems intensified in June , the within-connectedness of the EU FIs increased by another 5 percentage points at the beginning of August , before declining gradually in the first quarter of The dynamic behavior of the within-connectedness of the U.

FIs is in many regards significantly different from the one observed among the European FIs. To start with, it is lower than the within-connectedness of the European FIs. This is due to the presence of a larger number of FIs in the European sample 18 compared to the U. Furthermore, while the within-connectedness of the European FIs followed an upward trend with some corrections, the within-connectedness of the U. Interestingly, even though the crisis originated in the U.

FIs did not increase in the last quarter of , during the heyday of the financial crisis. To the contrary, it continued its downward move with a small correction in the first half of It jumped by approximately 5 percentage points in late-April, early-May , days before the announcement of the stress test results conducted on major U.

From mid to mid, the within-connectedness of the U. For most of , the within-connectedness of the U. In late and early , the connectedness of the U. Even though the connectedness of the Eurpean FIs started to increase again in the last quarter of , after the appointment of Mario Draghi as its President, there was a clear change in the policy stance of the European Central Bank ECB. On December 12, , the ECB announced a new facility to provide liquidity to the banking system with a longer maturity.

FIs started to decline. Within a quarter both indices declined by about percentage points. The connectedness of the European to the U. FIs continued its downward move until the end of , with a total decline of 10 percentage points. By the end of , the connectedness of the U. FIs to the European FIs also declined to a level lower than the pre-crisis levels. FI stocks are under the influence of the volatility that stems from the intense debate between the Obama Administration and the Republican Party about the fiscal policy stance.

The rise in the directional connectedness of the U. FIs to the European FIs in the first half of and at the beginning of resulted from the uncertainty caused by the political disagreements between the two wings of the U. Finally, the small blip in the U. FIs' connectedness to the European FIs in late May and June , was due to the Fed announcements that implied that the end of quantitative expansion policy of the U.

Central Bank was getting nearer. The uncertainty caused by the elections in Italy increased the volatility connectedness of the Italian FIs in late , and the directional connectedness from the EU FIs to the U. All in all, as of the end of May , the directional connectedness of the U. The within-connectedness of the U. It is therefore possible to conclude that the global financial crisis and the ensuing tremors in the continental Europe led to the intensification of the within volatility connectedness of the European banking industry.

As the volatility in the European banking industry subsided the within-connectedness of the European FIs went back to its intial levels. In this section, we analyze the connectedness of the major FIs in each country with their counterparts in other countries. In the previous section, we analyzed the volatility connectedness from the U. The difference between the two series is by definition the net-connectedness of the U. FIs vis-a-vis the other seven countries in the sample, all of which are members of the EU.

As could be observed in the previous section, it was positive during the U. These results are consistent with the essence of Figure 6. The net-connectedness of the U. FIs were the highest during the last 4 months of and early , and the second quarter of It moved to negative territory in late and stayed negative since then. For the majority of the countries in the sample from-connectedness plots are smoother.

Actually, from-connectedness plots for six continental EU member countries resemble the total connectedness plot presented in Figure 3. The from-connectedness plots for the United States differ from the from-connectedness plots for other countries, because American FIs actually generated the volatility connectedness to others during and until the collapse of Lehman Brothers.

While the from-connectedness of other countries' FIs increased in and through , American FIs' from-connectedness actually decreased in and fluctuated around percentage points until the collapse of Lehman Brothers in mid-September The from-connectedness of the American FIs also jumped significantly percentage points following the collapse of Lehman Brothers. The from-connectedness of the British FIs jumped by 80 percentage points.

Increases in other countries' from-connectedness was much less compared to the jumps experienced by the U. The dynamic behavior of the to-connectedness measures for each country are quite different from the dynamic behavior of the total connectedness measure. As the total connectedness measure is an average of the to-connectedness measures, its upward move will be limited compared to the to-connectedness of the country that was hit by the idiosyncratic shock.

For example, the to-connectedness of the American FIs actually declined in and stayed low for much of the remaining period, while the to-connectedness of the continental European FIs increased further. For the same reason, the to-connectedness of the countries in the sample differ from each other as well. While the to-connectedness of the German, French, Dutch, and British FIs increased following the Fed's decision to raise policy interest rates further in May and June , the to-connectedness of the Italian, Spanish, Belgian, and American FIs did not increase much during that episode.

The to-connectedness of the U. FIs increased again in following the announcement of the stress test results in May and once more in spring and summer of along with the build up of the Greek crisis. High to- and positive net-connectedness of French FIs during the liquidity crisis of August show their troubles during this period. On August 9, , BNP Paribas announced that it had frozen redemptions from three hedge funds, citing its inability to value structured products.

German FIs also suffered badly from the crisis. As the crisis worsened, by the first quarter of almost all German FIs made losses from their investments in the United States. Following the news about the write downs, net-connectedness of German FIs increased in the second and third quarter of and reached a maximum following the collapse of Lehman Brothers. Netherlands had high net-connectedness during and — UK FIs had significant losses in late and the first half of and their high to- and net-connectedness measures reveals the stress they were under.

Belgian FIs were in trouble following the bankruptcy of Lehman Brothers, during which their to- and net-connectedness stayed high. Both Fortis and Dexia were in the brink of collapse. In September , the French and Belgian governments supported Dexia with more than 6 billion euros. However, as the Greek crisis got worse the two governments decided to nationalize Dexia in October Fortis operations in Belgium, Netherlands and Luxembourg were broken up into three.

Following these downgrades both the to- and net-connectedness of the Italian FIs increased substantially in several months. The bad news for the Italian FIs were followed by the worries about the outcome of the Italian elections of February 28, As a result the to- and the net-connectedness of the Italian FIs did not start declining until March The net-connectedness measures of Spain, Germany, France, Italy, and Netherlands were mostly positive since the beginning of The net-connectedness measures for Belgium, the UK and the United States, on the other hand, were mostly negative during the — period.

The Belgium FIs already suffered big blows in late and early , and were put on life support from the government. Afterwards, they were in a passive mode, which explains their negative net-connectedness for most of the — period. During the faithful months of the summer of , the sharpest increase in the net-connectedness was observed for the Italian, Dutch, French, and German FIs. Interestingly, after the global financial crisis Spanish FIs' net-connectedness increased only toward the end of This shows that in the summer of , the markets were more worried about the sustainability of the Italian sovereign debt stock and the future of Italian FIs, rather than the Spanish FIs.

However, there was not an immediate impact on the net-connectedness of the Spanish FIs. However, the signs from the U. Federal Reserve that they might eventually wind-down the quantitative easing program in late or early led to a major reversal in capital outflows. As we have seen above, American FIs as a whole generated high levels of net volatility connectedness during the build up phase of the U.

In the post global financial crisis era, however, the direction of volatility connectedness has been mostly from the EU towards the U. In the remainder of this section, we analyze the directional volatility connectedness of each of the U. FI that generated the largest net volatility connectedness among all 28 FIs in the full-sample analysis presented in Figure 2.

Had it not purchased Wachovia, one of the major U. FIs that suffered substantial losses during the crisis, Wells Fargo would have contributed much less to the volatility connectedness across the U. During the heyday of the crisis, in the last quarter of the net-connectedness of WFC was briefly in the negative territory, indicating how it was affected from systemic risk generated by others. Despite the strength of its own financial position, Wells Fargo was affected badly from the balance sheet troubles of the FI it acquired.

Before and after the announcements of the stress test results in May , WFCs stock return volatility and volatility connectedness increased substantially. After Bank of America, this was the largest amount of capital the authorities required any U. The dynamic analysis of the volatility connectedness of Wells Fargo is very revealing in that it shows how misinformative could the full-sample analysis be about the state of the individual FIs. The fact that Citigroup had high net volatility connectedness at various instants during the crisis shows how troubled the FI was during the financial crisis.

Heimat Sure, online translators will tell you that Heimat means home, homeland, or heritage in English, but the German word is so much more complex than the meaning attached to each of these words. DPA For instance, by saying you find someone sympathisch jemanden sympathisch finden , you could mean that you feel close to a person in the sense that you trust them or you have a good gut feeling about them. This four-letter German word may be short but it packs a punch and here's why.

Kehrwoche To round off this list, here's a word that's very specific to German culture; in English it really can only be explained in a few sentences.

Political connectedness and firm performance: Evidence from Germany

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