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Article summary:

1. The Financial Crisis of 2007–2009 has led to increased interest in systemic risk, which refers to the interconnectedness and potential for propagation of financial distress within the financial system.

2. This paper proposes two econometric methods, principal components analysis and Granger-causality networks, to measure the connectedness between different types of financial institutions such as hedge funds, banks, broker/dealers, and insurance companies.

3. The empirical findings show that linkages within and across these sectors have become highly dynamic over time, increasing the channels through which shocks can propagate. Banks and insurers seem to have a more significant impact on hedge funds and broker/dealers than vice versa, suggesting that banks may be more central to systemic risk than the shadow banking system.

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