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Graphical network models for international financial flows

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Author Info

  • Paolo Giudici

    ()
    (Department of Economics and Management, University of Pavia)

  • Alessandro Spelta

    ()
    (Department of Economics and Management, University of Pavia)

Abstract

The late-2000s financial crisis has stressed the need of understanding the world financial system as a network of countries, where cross-border financial linkages play a fundamental role in the spread of systemic risks. Financial network models, that take into account the complex interrelationships between countries, seem to be an appropriate tool in this context. In this paper we propose to enrich the topological perspective of network models with a more structured statistical framework, that of graphical Gaussian models, which can be employed to accurately estimate the adjacency matrix, the main input for the estimation of the interconnections between different countries. We consider different types of graphical models: besides classical ones, we introduce Bayesian graphical models, that can take model uncertainty into account, and dynamic Bayesian graphical models, that provide a convenient framework to model temporal cross-border data, decomposing the model into autoregressive and contemporaneous networks. The paper shows how the application of the proposed models to the Bank of International Settlements locational banking statistics allows the identification of four distinct groups of countries, that can be considered central in systemic risk contagion.

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File URL: http://economia.unipv.it/docs/dipeco/quad/ps/RePEc/pav/demwpp/DEMWP0052.pdf
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Bibliographic Info

Paper provided by University of Pavia, Department of Economics and Management in its series DEM Working Papers Series with number 052.

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Length: 28 pages
Date of creation: Oct 2013
Date of revision:
Handle: RePEc:pav:demwpp:demwp0052

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Related research

Keywords: Financial network models; Graphical models; Bayesian model selection;

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References

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  1. Michael Boss & Helmut Elsinger & Martin Summer & Stefan Thurner, 2004. "An Empirical Analysis of the Network Structure of the Austrian Interbank Market," Financial Stability Report, Oesterreichische Nationalbank (Austrian Central Bank), issue 7.
  2. Garratt, Rodney & Mahadeva, Lavan & Svirydzenka, Katsiaryna, 2011. "Mapping systemic risk in the international banking network," Bank of England working papers 413, Bank of England.
  3. Daniel Felix Ahelegbey & Paolo Giudici, 2014. "Hierarchical Graphical Models, With Application To Systemic Risk," DEM Working Papers Series 063, University of Pavia, Department of Economics and Management.
  4. Sheri Markose & Simone Giansante & Mateusz Gatkowski & Ali Rais Shaghaghi, 2010. "Too Interconnected To Fail: Financial Contagion and Systemic Risk In Network Model of CDS and Other Credit Enhancement Obligations of US Banks," Working Papers 033, COMISEF.
  5. H. Huizinga & Ga�tan Nicod�me, 2001. "Are international deposits tax-driven?," European Economy - Economic Papers 152, Directorate General Economic and Monetary Affairs (DG ECFIN), European Commission.
  6. Kubelec, Chris & Sa, Filipa, 2010. "The geographical composition of national external balance sheets: 1980-2005," Bank of England working papers 384, Bank of England.
  7. Jackson, Matthew O. & Watts, Alison, 2002. "The Evolution of Social and Economic Networks," Journal of Economic Theory, Elsevier, vol. 106(2), pages 265-295, October.
  8. Matteo Barigozzi & Christian Brownlees, 2013. "Nets: Network Estimation for Time Series," Working Papers 723, Barcelona Graduate School of Economics.
  9. Kavonius, Ilja Kristian & Castrén, Olli, 2009. "Balance Sheet Interlinkages and Macro-Financial Risk Analysis in the Euro Area," Working Paper Series 1124, European Central Bank.
  10. Kimmo Soramaki & Morten L. Bech & Jeffrey Arnold & Robert J. Glass & Walter Beyeler, 2006. "The topology of interbank payment flows," Staff Reports 243, Federal Reserve Bank of New York.
  11. Tanya Araújo & R. Vilela Mendes, 2001. "Function and form in networks of interacting agents," Working Papers Department of Economics 2001/03, ISEG - School of Economics and Management, Department of Economics, University of Lisbon.
  12. Co-Pierre Georg & Jenny Poschmann, 2010. "Systemic risk in a network model of interbank markets with central bank activity," Jena Economic Research Papers 2010-033, Friedrich-Schiller-University Jena, Max-Planck-Institute of Economics.
  13. Peltonen, Tuomas A. & Scheicher, Martin & Vuillemey, Guillaume, 2013. "The network structure of the CDS market and its determinants," Working Paper Series 1583, European Central Bank.
  14. Minoiu, Camelia & Reyes, Javier A., 2013. "A network analysis of global banking: 1978–2010," Journal of Financial Stability, Elsevier, vol. 9(2), pages 168-184.
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