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Statistical estimation of time-varying complexity in financial networks

Author

Listed:
  • Aditi Rai

    (Indian Institute of Management, Vastrapur)

  • Avijit Bansal

    (Finance & Accounting Area, Indian Institute of Management, Vastrapur)

  • Anindya S. Chakrabarti

    (Economics Area, Indian Institute of Management, Vastrapur)

Abstract

In this paper, we propose a method to characterize the relation between financial market instability and the underlying complexity by identifying structural relationships in dynamics of stock returns. The proposed framework is amenable to statistical and econometric estimation techniques, and at the same time, provides a theoretical link between stability of a financial system and the embedded heterogeneity, in line of the May-Wigner result. We estimate the interaction matrix of stock returns through a vector autoregressive structure and compute heterogeneity in the strength of connections for time periods covering periods before the 2007–08 crisis, during the crisis and post-crisis recovery. We show that the empirically estimated heterogeneity increased substantially during time of financial crisis and subsequently tapered off, demonstrating concurrent rise and fall in the degree of instability. Graphical abstract

Suggested Citation

  • Aditi Rai & Avijit Bansal & Anindya S. Chakrabarti, 2019. "Statistical estimation of time-varying complexity in financial networks," The European Physical Journal B: Condensed Matter and Complex Systems, Springer;EDP Sciences, vol. 92(10), pages 1-9, October.
    • Handle: RePEc:spr:eurphb:v:92:y:2019:i:10:d:10.1140_epjb_e2019-100161-1
    DOI: 10.1140/epjb/e2019-100161-1
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    Cited by:

    1. Jalshayin Bhachech & Arnab Chakrabarti & Taisei Kaizoji & Anindya S. Chakrabarti, 2022. "Instability of networks: effects of sampling frequency and extreme fluctuations in financial data," The European Physical Journal B: Condensed Matter and Complex Systems, Springer;EDP Sciences, vol. 95(4), pages 1-14, April.

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    Keywords

    Statistical and Nonlinear Physics;

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