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Connecting the dots: Econometric methods for uncovering networks with an application to the Australian financial institutions

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  • Anufriev, Mikhail
  • Panchenko, Valentyn

Abstract

This paper connects variance–covariance estimation methods, Gaussian graphical models, and the growing literature on economic and financial networks. We construct the network using the concept of partial correlations which captures direct linear dependence between any two entities, conditional on dependence between all other entities. We relate the centrality measures of this network to shock propagation. The methodology is applied to construct the perceived network of publicly traded Australian banks and their connections to domestic economic sectors and international markets. We find strong links between the big four Australian banks, real estate and other sectors of the economy, and determine which entities play a central role in transmitting and absorbing the shocks.

Suggested Citation

  • Anufriev, Mikhail & Panchenko, Valentyn, 2015. "Connecting the dots: Econometric methods for uncovering networks with an application to the Australian financial institutions," Journal of Banking & Finance, Elsevier, vol. 61(S2), pages 241-255.
  • Handle: RePEc:eee:jbfina:v:61:y:2015:i:s2:p:s241-s255 DOI: 10.1016/j.jbankfin.2015.08.034
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    References listed on IDEAS

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    Cited by:

    1. Silva, Thiago Christiano & Tabak, Benjamin Miranda & Guerra, Solange Maria, 2017. "Why do vulnerability cycles matter in financial networks?," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 471(C), pages 592-606.
    2. repec:eee:finsta:v:33:y:2017:i:c:p:23-40 is not listed on IDEAS
    3. M. Hakan Eratalay & Evgenii Vladimirov, 2017. "Mapping the Stocks in MICEX: Who Is Central in Moscow Stock Exchange?," EUSP Department of Economics Working Paper Series Ec-01/17, European University at St. Petersburg, Department of Economics.
    4. Mardi Dungey & Marius Matei & Matteo Luciani & David Veredas, 2017. "Surfing through the GFC: Systemic Risk in Australia," The Economic Record, The Economic Society of Australia, vol. 93(300), pages 1-19, March.
    5. Dungey, Mardi & Harvey, John & Volkov, Vladimir, 2017. "The changing international network of sovereign debt and financial institutions," Working Papers 2017-04, University of Tasmania, Tasmanian School of Business and Economics.
    6. Silva, Walmir & Kimura, Herbert & Sobreiro, Vinicius Amorim, 2017. "An analysis of the literature on systemic financial risk: A survey," Journal of Financial Stability, Elsevier, vol. 28(C), pages 91-114.

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