How do normalization schemes affect net spillovers? A replication of the Diebold and Yilmaz (2012) study

Cross-country connectedness in inflation and unemployment: measurement and macroeconomic consequences

“…This corresponds to the analysis we have performed. Although this property does not hold under the alternative normalization schemes, Caloia et al (2019) remark the accuracy of the resulting computation of connectedness and the preservation of the sign of the spillovers' net contribution. Hence, to assess the robustness of our results and analysis, Table 9 presents the computation of connectedness for the unemployment rate (Panel A) and the Consumer Price Index (Panel B) using the "Row Sum," "Row Max" and "Spectral" normalization rules.…”

“…The traditional scheme is a row sum normalization rule by DY (2012) called "Row Sum" (see Equation (A6) in the Online Appendix). Caloia et al (2019), however, explain that different normalization rules have the potential to lead to a different interpretation of the results. As a consequence, it is important to check the robustness of our results when filtered by different normalization schemes such as the extra ones proposed by Caloia et al (2019).…”

“…Caloia et al (2019), however, explain that different normalization rules have the potential to lead to a different interpretation of the results. As a consequence, it is important to check the robustness of our results when filtered by different normalization schemes such as the extra ones proposed by Caloia et al (2019). These are scalarbased normalization schemes in which the denominator of Equation (A6) is substituted by some scalar.…”

“…One key methodological issue refers to the index's normalization method, which admits different possibilities. In order to assess the robustness of DY's (2012) row sum rule, we apply three alternative rules suggested in Caloia et al (2019), namely max row normalization, max column normalization, and spectral radius normalization.…”

“…First, time-varying DY spillovers are thoroughly examined by rolling estimations. Second, we apply Caloia et al's (2019) alternative normalization schemes to gain further insights on both the strength of connectedness and its net directional effect.…”