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Dynamic structure of the US financial systems

Khaldoun Khashanah (Financial Engineering Program, Stevens Institute of Technology, Hoboken, New Jersey, USA)
Linyan Miao (Economic Research Department, Export‐Import Bank of China, Beijing, China)

Studies in Economics and Finance

ISSN: 1086-7376

Article publication date: 4 October 2011




This paper empirically investigates the structural evolution of the US financial systems. It particularly aims to explore if the structure of the financial systems changes when the economy enters a recession.


The empirical analysis is conducted through the statistical approach of principal components analysis (PCA) and the graph theoretic approach of minimum spanning trees (MSTs).


The PCA results suggest that the VIX was the dominant factor influencing the financial system prior to the recession; however, the monetary policy represented by the three‐month T‐bill yield became the leading factor in the system during the recession. By analyzing the MSTs, we find evidence that the structure of the financial system during the economic recession is substantially different from that during the period of economic expansion. Moreover, we discover that the financial markets are more integrated during the economic recession. The much stronger integration of the financial system was found to start right before the advent of the recession.

Practical implications

Research findings will help individuals, institutions, regulators, central bankers better understand the market structure under the economic turmoil, so more efficient strategies can be used to minimize the systemic risk.


This study compares the structure of the US financial markets in economic expansion and contraction periods. The structural dynamics of the financial system are explored, focusing on the recent economic recession triggered by the US subprime mortgage crisis. We introduce a new systemic risk measure.



Khashanah, K. and Miao, L. (2011), "Dynamic structure of the US financial systems", Studies in Economics and Finance, Vol. 28 No. 4, pp. 321-339.



Emerald Group Publishing Limited

Copyright © 2011, Emerald Group Publishing Limited

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