Measuring the connectedness of the Nigerian banking network and its implications for systemic risk
This study examines fifteen major banks’ network connectedness in the Nigerian banking system via its stock returns. The paper studies both the static and dynamic network connectedness of banks built on the generalized forecast error variance decomposition, using daily data from January 4, 2005, to...
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| Format: | Article |
| Language: | English |
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Modern Finance Institute
2024-11-01
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| Series: | Modern Finance |
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| Online Access: | https://mf-journal.com/article/view/111 |
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| author | Miriam Kamah Joshua Riti |
| author_facet | Miriam Kamah Joshua Riti |
| author_sort | Miriam Kamah |
| collection | DOAJ |
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This study examines fifteen major banks’ network connectedness in the Nigerian banking system via its stock returns. The paper studies both the static and dynamic network connectedness of banks built on the generalized forecast error variance decomposition, using daily data from January 4, 2005, to June 28, 2019, of publicly traded banks. This study finds a substantial total connectedness, with a high pairwise connectedness among the system’s large banks. The dynamic evolution of connectedness in the network reveals that banks’ connectivity increases in response to certain economic episodes. The evolution of the global network's topological properties reveals that it is mainly susceptible to shocks threatening its stability. Additionally, the study computes a composite index of systemic importance for the Nigerian banking system by combining several network centrality metrics using the principal component analysis. The outcome shows that large banks are more centralized in the network, and the larger the scale of assets a bank has, the more systemically relevant the bank is in the network. Since systemic risk emanates from connectedness, frequent assessment of the banking system's connectedness and systemic importance will aid policy decisions. The proposed measure of systemic importance can be incorporated into the CBN’s stress testing mechanism for fast-tracking risk potential banks.
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| format | Article |
| id | doaj-art-a9e06c366fa84c84a99d30962aba3dc4 |
| institution | Kabale University |
| issn | 2956-7742 |
| language | English |
| publishDate | 2024-11-01 |
| publisher | Modern Finance Institute |
| record_format | Article |
| series | Modern Finance |
| spelling | doaj-art-a9e06c366fa84c84a99d30962aba3dc42024-11-27T14:35:02ZengModern Finance InstituteModern Finance2956-77422024-11-012210.61351/mf.v2i2.111Measuring the connectedness of the Nigerian banking network and its implications for systemic riskMiriam Kamah0Joshua Riti1Department of Economics, Faculty of Social Sciences, Plateau State University, Bokkos, Plateau State, NigeriaUniversity of Jos This study examines fifteen major banks’ network connectedness in the Nigerian banking system via its stock returns. The paper studies both the static and dynamic network connectedness of banks built on the generalized forecast error variance decomposition, using daily data from January 4, 2005, to June 28, 2019, of publicly traded banks. This study finds a substantial total connectedness, with a high pairwise connectedness among the system’s large banks. The dynamic evolution of connectedness in the network reveals that banks’ connectivity increases in response to certain economic episodes. The evolution of the global network's topological properties reveals that it is mainly susceptible to shocks threatening its stability. Additionally, the study computes a composite index of systemic importance for the Nigerian banking system by combining several network centrality metrics using the principal component analysis. The outcome shows that large banks are more centralized in the network, and the larger the scale of assets a bank has, the more systemically relevant the bank is in the network. Since systemic risk emanates from connectedness, frequent assessment of the banking system's connectedness and systemic importance will aid policy decisions. The proposed measure of systemic importance can be incorporated into the CBN’s stress testing mechanism for fast-tracking risk potential banks. https://mf-journal.com/article/view/111ConnectednessNetworkSystemic RiskStock returnsBanking system |
| spellingShingle | Miriam Kamah Joshua Riti Measuring the connectedness of the Nigerian banking network and its implications for systemic risk Modern Finance Connectedness Network Systemic Risk Stock returns Banking system |
| title | Measuring the connectedness of the Nigerian banking network and its implications for systemic risk |
| title_full | Measuring the connectedness of the Nigerian banking network and its implications for systemic risk |
| title_fullStr | Measuring the connectedness of the Nigerian banking network and its implications for systemic risk |
| title_full_unstemmed | Measuring the connectedness of the Nigerian banking network and its implications for systemic risk |
| title_short | Measuring the connectedness of the Nigerian banking network and its implications for systemic risk |
| title_sort | measuring the connectedness of the nigerian banking network and its implications for systemic risk |
| topic | Connectedness Network Systemic Risk Stock returns Banking system |
| url | https://mf-journal.com/article/view/111 |
| work_keys_str_mv | AT miriamkamah measuringtheconnectednessofthenigerianbankingnetworkanditsimplicationsforsystemicrisk AT joshuariti measuringtheconnectednessofthenigerianbankingnetworkanditsimplicationsforsystemicrisk |