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Temporal networks and financial contagion

Author

Listed:
  • Franch, Fabio
  • Nocciola, Luca
  • Vouldis, Angelos

Abstract

This paper studies the dynamics of contagion across the banking, insurance and shadow banking sectors of 18 advanced economies in the period 2006-2018. We construct Granger causality-in-risk networks and introduce higher-order aggregate networks and higher-order node centralities in an economic setting to capture non-Markovian network features. Our approach uncovers the dynamics of financial contagion as it is transmitted across segments of the financial system and jurisdictions. The calculated higher-order centralities identify sectors in distress as the nodes through which contagion propagates. The banking system emerges as the primary source and transmitter of stress while banks and shadow banks are highly interconnected. The insurance sector is found to contribute less to stress transmission in all periods, except during the global financial crisis. The proposed approach is able to identify clearly the sectors that are critical for the transmission of financial contagion, in contrast to the commonly used memoryless measures of network centrality.

Suggested Citation

  • Franch, Fabio & Nocciola, Luca & Vouldis, Angelos, 2024. "Temporal networks and financial contagion," Journal of Financial Stability, Elsevier, vol. 71(C).
    • Handle: RePEc:eee:finsta:v:71:y:2024:i:c:s1572308924000093
    DOI: 10.1016/j.jfs.2024.101224
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    Cited by:

    1. Marina Yu. Malkina & Dmitry Yu. Rogachev, 2024. "Financial Contagion of the Russian Stock Market from the European Stock Market During the COVID-19 Pandemic," Finansovyj žhurnal — Financial Journal, Financial Research Institute, Moscow 125375, Russia, issue 2, pages 27-42, April.

    More about this item

    Keywords

    Financial institutions; Systemic risk; Network analysis; Financial crisis; Contagion;
    All these keywords.

    JEL classification:

    • C02 - Mathematical and Quantitative Methods - - General - - - Mathematical Economics
    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • G01 - Financial Economics - - General - - - Financial Crises
    • G2 - Financial Economics - - Financial Institutions and Services

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