Returns co-movement and interconnectedness : evidence from Indonesia banking system

In this paper, we explore how asset returns used as a proxy to detect interconnectedness of systemic risk in the financial system. Our sample employs a mixture of Indonesian banks’ public and prudential data over the 2012–2019 period. Using the Principal Component Analysis and Granger causality the core banks in the network could explain the variance, risk co-movement, and show shocks propagation. Further, the results are also in line with Basel indicator-based to score the interconnectedness. The dominance of big size banks in the centrality measures raises issue of substitutability. This paper outstretched theories and their application provides a basis for policy makers to develop supervision frameworks to mitigate systemic risk.