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Financial networks and interconnectedness in an advanced emerging market economy

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  • Ariel J. Sun
  • Jorge A. Chan-Lau

Abstract

Financial networks could become fragile during periods of economic and financial distress, since interconnectedness among participating firms could transmit and amplify adverse shocks. Relying on balance sheet data, complemented with information on interbank exposures, this paper analyses interconnectedness in an advanced emerging market economy, using two complementary approaches. The first approach focuses on the financial network topology, and finds that the financial system resembles a highly clustered small world network, with in and out-degrees, connectivity and exposures exhibiting a (double) heavy tail behaviour, which favours the formation of strong community structure and preferential attachment in the network. Bank size is Pareto distributed, and highly correlated with centrality. The second approach focuses on how the network topology contributes to the transmission of shocks by modelling default contagion, using balance sheet network analysis. It finds that direct counterparty credit exposure poses less risk to the banking system than fire sale losses triggered by liquidity shocks. Both approaches, either using a topological or induced system losses perspective, identify systemically important financial institutions (SIFIs) consistently by accounting for both macro and microprudential risk dimensions.

Suggested Citation

  • Ariel J. Sun & Jorge A. Chan-Lau, 2017. "Financial networks and interconnectedness in an advanced emerging market economy," Quantitative Finance, Taylor & Francis Journals, vol. 17(12), pages 1833-1858, December.
  • Handle: RePEc:taf:quantf:v:17:y:2017:i:12:p:1833-1858
    DOI: 10.1080/14697688.2017.1357976
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    References listed on IDEAS

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    1. Gorton, Gary B., 2010. "Slapped by the Invisible Hand: The Panic of 2007," OUP Catalogue, Oxford University Press, number 9780199734153.
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    Cited by:

    1. Arreola Hernandez, Jose & Kang, Sang Hoon & Shahzad, Syed Jawad Hussain & Yoon, Seong-Min, 2020. "Spillovers and diversification potential of bank equity returns from developed and emerging America," The North American Journal of Economics and Finance, Elsevier, vol. 54(C).
    2. Mardi Dungey & Moses Kangogo & Vladimir Volkov, 2022. "Dynamic effects of network exposure on equity markets," Eurasian Economic Review, Springer;Eurasia Business and Economics Society, vol. 12(4), pages 569-629, December.
    3. Kangogo, Moses & Volkov, Vladimir, 2021. "Dynamic effects of network exposure on equity markets," Working Papers 2021-03, University of Tasmania, Tasmanian School of Business and Economics.
    4. Maria Rosa Borges & Lauriano Ulica & Mariya Gubareva, 2020. "Systemic risk in the Angolan interbank payment system – a network approach," Applied Economics, Taylor & Francis Journals, vol. 52(45), pages 4900-4912, September.
    5. Morteza Alaeddini & Philippe Madiès & Paul J. Reaidy & Julie Dugdale, 2023. "Interbank money market concerns and actors’ strategies—A systematic review of 21st century literature," Journal of Economic Surveys, Wiley Blackwell, vol. 37(2), pages 573-654, April.
    6. Jose Arreola Hernandez & Sang Hoon Kang & Seong‐Min Yoon, 2022. "Interdependence and portfolio optimisation of bank equity returns from developed and emerging Europe," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 27(1), pages 678-696, January.
    7. Kangogo, Moses & Volkov, Vladimir, 2022. "Detecting signed spillovers in global financial markets: A Markov-switching approach," International Review of Financial Analysis, Elsevier, vol. 82(C).
    8. Jose Arreola Hernandez & Sang Hoon Kang & Ron P. McIver & Seong-Min Yoon, 2021. "Network Interdependence and Optimization of Bank Portfolios from Developed and Emerging Asia Pacific Countries," Asia-Pacific Financial Markets, Springer;Japanese Association of Financial Economics and Engineering, vol. 28(4), pages 613-647, December.

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