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Network topology and systemic risk: Evidence from the Euro Stoxx market

Author

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  • Li, Wenwei
  • Hommel, Ulrich
  • Paterlini, Sandra

Abstract

This study investigates the network topology of equity volatilities. We propose a novel approach to model the interdependencies of the Euro Stoxx companies by constructing the minimum spanning tree with the upper tail dependence coefficient of the equity volatility. The empirical results demonstrate the usefulness of the network topology for the detection of systemic risk in high-volatility environments. More specifically, during crisis periods, the topology of the minimum spanning tree becomes more star-like and compact, accompanied by stronger rich-club effects. Such a network configuration is known to be less resilient to shock and more prone to systemic risk.

Suggested Citation

  • Li, Wenwei & Hommel, Ulrich & Paterlini, Sandra, 2018. "Network topology and systemic risk: Evidence from the Euro Stoxx market," Finance Research Letters, Elsevier, vol. 27(C), pages 105-112.
  • Handle: RePEc:eee:finlet:v:27:y:2018:i:c:p:105-112
    DOI: 10.1016/j.frl.2018.02.016
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    References listed on IDEAS

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    1. Betz, Frank & Hautsch, Nikolaus & Peltonen, Tuomas A. & Schienle, Melanie, 2016. "Systemic risk spillovers in the European banking and sovereign network," Journal of Financial Stability, Elsevier, vol. 25(C), pages 206-224.
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    More about this item

    Keywords

    Systemic risk; Copula; Tail dependence; Minimum spanning tree;

    JEL classification:

    • C1 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General
    • G1 - Financial Economics - - General Financial Markets
    • G2 - Financial Economics - - Financial Institutions and Services
    • G3 - Financial Economics - - Corporate Finance and Governance

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