Financial Network and Industry Connectedness

In this paper, we utilize the Diebold-Yilmaz Connectedness Index framework to investigate the industry volatility network based on industry portfolios from 1927 to 2020. Systemwide volatility connectedness fluctuates significantly in the sample. The static analysis shows the industry of durable goods, energy, and telecommunications are risk receivers, and non-durables, manufacturing, and other send the volatility to others. The dynamic analysis indicates telecommunications industry switches from a risk receiver to a risk sender after 2000, while finance industry becomes the biggest source of risk spreading to others during the financial crisis of 2007-2009. The centrality and connectedness of the industry volatility network have important economic implications. The total connectedness of industries measures systemic risk and the returns of industries predict market returns when these industries are more central.