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Fragmentation, integration and macroprudential surveillance of the US financial industry: Insights from network science

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  • Yerali Gandica
  • Marco Valerio Geraci
  • Sophie Béreau
  • Jean-Yves Gnabo

Abstract

Drawing on recent contributions inferring financial interconnectedness from market data, our paper provides new insights on the evolution of the US financial industry over a long period of time by using several tools coming from network science. Relying on a Time-Varying Parameter Vector AutoRegressive (TVP-VAR) approach on stock market returns to retrieve unobserved directed links among financial institutions, we reconstruct a fully dynamic network in the sense that connections are let to evolve through time. The financial system analysed consists of a large set of 155 financial institutions that are all the banks, broker-dealers, insurance and real estate companies listed in the Standard & Poors’ 500 index over the 1993–2014 period. Looking alternatively at the individual, then sector-, community- and system-wide levels, we show that network sciences’ tools are able to support well-known features of the financial markets such as the dramatic fall of connectivity following Lehman Brothers’ collapse. More importantly, by means of less traditional metrics, such as sectoral interface or measurements based on contagion processes, our results document the co-existence of both fragmentation and integration phases between firms independently from the sectors they belong to, and doing so, question the relevance of existing macroprudential surveillance frameworks which have been mostly developed on a sectoral basis. Overall, our results improve our understanding of the US financial landscape and may have important implications for risk monitoring as well as macroprudential policy design.

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  • Yerali Gandica & Marco Valerio Geraci & Sophie Béreau & Jean-Yves Gnabo, 2018. "Fragmentation, integration and macroprudential surveillance of the US financial industry: Insights from network science," PLOS ONE, Public Library of Science, vol. 13(4), pages 1-23, April.
    • Handle: RePEc:plo:pone00:0195110
    DOI: 10.1371/journal.pone.0195110
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    3. Li, Houjian & Li, Yanjiao & Guo, Lili, 2023. "Extreme risk spillover effect and dynamic linkages between uncertainty and commodity markets: A comparison between China and America," Resources Policy, Elsevier, vol. 85(PA).

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