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Dynamic Spatial Treatment Effects and Network Fragility: Theory and Evidence from European Banking

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  • Kikuchi, Tatsuru

Abstract

This paper develops and empirically implements a continuous functional framework for analyzing systemic risk in financial networks, building on the dynamic spatial treatment effect methodology established in \citet{kikuchi2024dynamical}. We extend the Navier-Stokes-based approach from \citet{kikuchi2024navier} to characterize contagion dynamics in the European banking system through the spectral properties of network evolution operators. Using high-quality bilateral exposure data from the European Banking Authority Transparency Exercise (2014-2023), we estimate the causal impact of the COVID-19 pandemic on network fragility using spatial difference-in-differences methods adapted from \citet{kikuchi2024dynamical}. Our empirical analysis reveals that COVID-19 elevated network fragility, measured by the algebraic connectivity $\lambda_2$ of the system Laplacian, by 26.9\% above pre-pandemic levels (95\% CI: [7.4\%, 46.5\%], p$

Suggested Citation

  • Kikuchi, Tatsuru, 2025. "Dynamic Spatial Treatment Effects and Network Fragility: Theory and Evidence from European Banking," MPRA Paper 126721, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:126721
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    File URL: https://mpra.ub.uni-muenchen.de/126721/1/MPRA_paper_126721.pdf
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    JEL classification:

    • C31 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Cross-Sectional Models; Spatial Models; Treatment Effect Models; Quantile Regressions; Social Interaction Models
    • C63 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computational Techniques
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • G01 - Financial Economics - - General - - - Financial Crises
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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