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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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    References listed on IDEAS

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    1. Prasanna Gai & Sujit Kapadia, 2010. "Contagion in financial networks," Bank of England Staff Working Paper series 383, Bank of England.
    2. Upper, Christian, 2011. "Simulation methods to assess the danger of contagion in interbank markets," Journal of Financial Stability, Elsevier, vol. 7(3), pages 111-125, August.
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    Keywords

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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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