IDEAS home Printed from https://ideas.repec.org/p/pra/mprapa/92634.html
   My bibliography  Save this paper

The Econometrics of Bayesian Graphical Models: A Review With Financial Application

Author

Listed:
  • Ahelegbey, Daniel Felix

Abstract

Recent advances in empirical finance has shown that the adoption of network theory is critical to understand contagion and systemic vulnerabilities. While interdependencies among financial markets have been widely examined, only few studies review networks, however, they do not focus on the econometrics aspects. This paper presents a state-of-the-art review on the interface between statistics and econometrics in the inference and application of Bayesian graphical models. We specifically highlight the connections and possible applications of network models in financial econometrics, in the context of systemic risk.

Suggested Citation

  • Ahelegbey, Daniel Felix, 2015. "The Econometrics of Bayesian Graphical Models: A Review With Financial Application," MPRA Paper 92634, University Library of Munich, Germany, revised 25 Apr 2016.
  • Handle: RePEc:pra:mprapa:92634
    as

    Download full text from publisher

    File URL: https://mpra.ub.uni-muenchen.de/92634/1/MPRA_paper_92634.pdf
    File Function: original version
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Diebold, Francis X. & Yılmaz, Kamil, 2014. "On the network topology of variance decompositions: Measuring the connectedness of financial firms," Journal of Econometrics, Elsevier, vol. 182(1), pages 119-134.
    2. De Bandt, Olivier & Hartmann, Philipp, 2000. "Systemic risk: A survey," Working Paper Series 35, European Central Bank.
    3. Matthew O. Jackson, 2014. "Networks in the Understanding of Economic Behaviors," Journal of Economic Perspectives, American Economic Association, vol. 28(4), pages 3-22, Fall.
    4. Billio, Monica & Getmansky, Mila & Lo, Andrew W. & Pelizzon, Loriana, 2012. "Econometric measures of connectedness and systemic risk in the finance and insurance sectors," Journal of Financial Economics, Elsevier, vol. 104(3), pages 535-559.
    5. Mardi Dungey & Matteo Luciani & David Veredas, 2012. "Ranking Systemically Important Financial Institutions," CAMA Working Papers 2012-47, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
    6. Battiston, Stefano & Delli Gatti, Domenico & Gallegati, Mauro & Greenwald, Bruce & Stiglitz, Joseph E., 2012. "Liaisons dangereuses: Increasing connectivity, risk sharing, and systemic risk," Journal of Economic Dynamics and Control, Elsevier, vol. 36(8), pages 1121-1141.
    7. Mr. C. A. E. Goodhart & Miguel A. Segoviano, 2009. "Banking Stability Measures," IMF Working Papers 2009/004, International Monetary Fund.
    8. MArdi Dungey & Renee Fry & Brenda Gonzales-Hermosillo & Vance L. Martin & Chrismin Tang, 2008. "Are Financial Crises Alike?," CAMA Working Papers 2008-15, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
    9. Hoff P.D. & Raftery A.E. & Handcock M.S., 2002. "Latent Space Approaches to Social Network Analysis," Journal of the American Statistical Association, American Statistical Association, vol. 97, pages 1090-1098, December.
    10. Stephen A. Ross, 2013. "The Arbitrage Theory of Capital Asset Pricing," World Scientific Book Chapters, in: Leonard C MacLean & William T Ziemba (ed.), HANDBOOK OF THE FUNDAMENTALS OF FINANCIAL DECISION MAKING Part I, chapter 1, pages 11-30, World Scientific Publishing Co. Pte. Ltd..
    11. Markus K. Brunnermeier & Lasse Heje Pedersen, 2009. "Market Liquidity and Funding Liquidity," The Review of Financial Studies, Society for Financial Studies, vol. 22(6), pages 2201-2238, June.
    12. Ben S. Bernanke & Jean Boivin & Piotr Eliasz, 2005. "Measuring the Effects of Monetary Policy: A Factor-Augmented Vector Autoregressive (FAVAR) Approach," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 120(1), pages 387-422.
    13. Guido Consonni & Luca La Rocca, 2012. "Objective Bayes Factors for Gaussian Directed Acyclic Graphical Models," Scandinavian Journal of Statistics, Danish Society for Theoretical Statistics;Finnish Statistical Society;Norwegian Statistical Association;Swedish Statistical Association, vol. 39(4), pages 743-756, December.
    14. Xin Huang & Hao Zhou & Haibin Zhu, 2012. "Systemic Risk Contributions," Journal of Financial Services Research, Springer;Western Finance Association, vol. 42(1), pages 55-83, October.
    15. Nikolaus Hautsch & Julia Schaumburg & Melanie Schienle, 2015. "Financial Network Systemic Risk Contributions," Review of Finance, European Finance Association, vol. 19(2), pages 685-738.
    16. L. F. Wright, 2007. "Bayesian Networks and Probabilistic Inference in Forensic Science," Journal of the Royal Statistical Society Series A, Royal Statistical Society, vol. 170(4), pages 1187-1187, October.
    17. C. M. Carvalho & J. G. Scott, 2009. "Objective Bayesian model selection in Gaussian graphical models," Biometrika, Biometrika Trust, vol. 96(3), pages 497-512.
    18. Daron Acemoglu & Asuman Ozdaglar & Alireza Tahbaz-Salehi, 2015. "Systemic Risk and Stability in Financial Networks," American Economic Review, American Economic Association, vol. 105(2), pages 564-608, February.
    19. Marco Grzegorczyk & Dirk Husmeier & Jörg Rahnenführer, 2011. "Modelling non-stationary dynamic gene regulatory processes with the BGM model," Computational Statistics, Springer, vol. 26(2), pages 199-218, June.
    20. Eichler, Michael, 2007. "Granger causality and path diagrams for multivariate time series," Journal of Econometrics, Elsevier, vol. 137(2), pages 334-353, April.
    21. Selva Demiralp & Kevin D. Hoover, 2003. "Searching for the Causal Structure of a Vector Autoregression," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 65(s1), pages 745-767, December.
    22. Diks Cees & Panchenko Valentyn, 2005. "A Note on the Hiemstra-Jones Test for Granger Non-causality," Studies in Nonlinear Dynamics & Econometrics, De Gruyter, vol. 9(2), pages 1-9, June.
    23. Segoviano, Miguel A. & Goodhart, Charles, 2009. "Banking stability measures," LSE Research Online Documents on Economics 24416, London School of Economics and Political Science, LSE Library.
    24. Lian, Heng & Feng, Sanying & Zhao, Kaifeng, 2015. "Parametric and semiparametric reduced-rank regression with flexible sparsity," Journal of Multivariate Analysis, Elsevier, vol. 136(C), pages 163-174.
    25. Granger, C W J, 1969. "Investigating Causal Relations by Econometric Models and Cross-Spectral Methods," Econometrica, Econometric Society, vol. 37(3), pages 424-438, July.
    26. Miyamura, Masashi & Kano, Yutaka, 2006. "Robust Gaussian graphical modeling," Journal of Multivariate Analysis, Elsevier, vol. 97(7), pages 1525-1550, August.
    27. Dornbusch, Rudiger & Park, Yung Chul & Claessens, Stijn, 2000. "Contagion: Understanding How It Spreads," The World Bank Research Observer, World Bank, vol. 15(2), pages 177-197, August.
    28. Mardi Dungey & Renee Fry & Brenda Gonzalez-Hermosillo & Vance Martin, 2005. "Empirical modelling of contagion: a review of methodologies," Quantitative Finance, Taylor & Francis Journals, vol. 5(1), pages 9-24.
    29. Lisha Chen & Jianhua Z. Huang, 2012. "Sparse Reduced-Rank Regression for Simultaneous Dimension Reduction and Variable Selection," Journal of the American Statistical Association, Taylor & Francis Journals, vol. 107(500), pages 1533-1545, December.
    30. Daniel Felix Ahelegbey & Paolo Giudici, 2014. "Bayesian Selection of Systemic Risk Networks," Advances in Econometrics, in: Bayesian Model Comparison, volume 34, pages 117-153, Emerald Group Publishing Limited.
    31. Alessio Moneta, 2008. "Graphical causal models and VARs: an empirical assessment of the real business cycles hypothesis," Empirical Economics, Springer, vol. 35(2), pages 275-300, September.
    32. Diebold, Francis X. & Yilmaz, Kamil, 2015. "Financial and Macroeconomic Connectedness: A Network Approach to Measurement and Monitoring," OUP Catalogue, Oxford University Press, number 9780199338306.
    33. Roll, Richard, 1977. "A critique of the asset pricing theory's tests Part I: On past and potential testability of the theory," Journal of Financial Economics, Elsevier, vol. 4(2), pages 129-176, March.
    34. Jukka Corander & Mattias Villani, 2006. "A Bayesian Approach to Modelling Graphical Vector Autoregressions," Journal of Time Series Analysis, Wiley Blackwell, vol. 27(1), pages 141-156, January.
    35. Daniel Felix Ahelegbey & Monica Billio & Roberto Casarin, 2016. "Bayesian Graphical Models for STructural Vector Autoregressive Processes," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 31(2), pages 357-386, March.
    36. Hoover,Kevin D., 2001. "Causality in Macroeconomics," Cambridge Books, Cambridge University Press, number 9780521002882, September.
    37. Brunnermeier, Markus K. & Oehmke, Martin, 2013. "Bubbles, Financial Crises, and Systemic Risk," Handbook of the Economics of Finance, in: G.M. Constantinides & M. Harris & R. M. Stulz (ed.), Handbook of the Economics of Finance, volume 2, chapter 0, pages 1221-1288, Elsevier.
    38. Marcello Pericoli & Massimo Sbracia, 2003. "A Primer on Financial Contagion," Journal of Economic Surveys, Wiley Blackwell, vol. 17(4), pages 571-608, September.
    39. Bhaskar DasGupta & Lakshmi Kaligounder, 2012. "On Global Stability of Financial Networks," Papers 1208.3789, arXiv.org, revised Aug 2014.
    40. repec:eca:wpaper:2013/130530 is not listed on IDEAS
    41. Gai, Prasanna & Haldane, Andrew & Kapadia, Sujit, 2011. "Complexity, concentration and contagion," Journal of Monetary Economics, Elsevier, vol. 58(5), pages 453-470.
    42. Mark S. Handcock & Adrian E. Raftery & Jeremy M. Tantrum, 2007. "Model‐based clustering for social networks," Journal of the Royal Statistical Society Series A, Royal Statistical Society, vol. 170(2), pages 301-354, March.
    43. Selva Demiralp & Kevin D. Hoover, 2003. "Searching for the Causal Structure of a Vector Autoregression," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 65(s1), pages 745-767, December.
    44. Alberto Roverato, 2002. "Hyper Inverse Wishart Distribution for Non‐decomposable Graphs and its Application to Bayesian Inference for Gaussian Graphical Models," Scandinavian Journal of Statistics, Danish Society for Theoretical Statistics;Finnish Statistical Society;Norwegian Statistical Association;Swedish Statistical Association, vol. 29(3), pages 391-411, September.
    45. William F. Sharpe, 1964. "Capital Asset Prices: A Theory Of Market Equilibrium Under Conditions Of Risk," Journal of Finance, American Finance Association, vol. 19(3), pages 425-442, September.
    46. Rama Cont & Amal Moussa & Edson B Santos, 2013. "Network structure and systemic risk in banking systems," Post-Print hal-00912018, HAL.
    47. repec:pri:metric:wp047_2012_brunnermeier_ssrn-id2103814.pdf is not listed on IDEAS
    48. Daniel Felix Ahelegbey & Monica Billio & Roberto Casarin, 2016. "Sparse Graphical Vector Autoregression: A Bayesian Approach," Annals of Economics and Statistics, GENES, issue 123-124, pages 333-361.
    49. Carlos M. Carvalho & Hélène Massam & Mike West, 2007. "Simulation of hyper-inverse Wishart distributions in graphical models," Biometrika, Biometrika Trust, vol. 94(3), pages 647-659.
    50. Eugene F. Fama & Kenneth R. French, 2004. "The Capital Asset Pricing Model: Theory and Evidence," Journal of Economic Perspectives, American Economic Association, vol. 18(3), pages 25-46, Summer.
    51. Kun Chen & Hongbo Dong & Kung-Sik Chan, 2013. "Reduced rank regression via adaptive nuclear norm penalization," Biometrika, Biometrika Trust, vol. 100(4), pages 901-920.
    52. Ming Yuan & Yi Lin, 2006. "Model selection and estimation in regression with grouped variables," Journal of the Royal Statistical Society Series B, Royal Statistical Society, vol. 68(1), pages 49-67, February.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Zhu, Bo & Liu, Jiahao & Lin, Renda & Chevallier, Julien, 2021. "Cross-border systemic risk spillovers in the global oil system: Does the oil trade pattern matter?," Energy Economics, Elsevier, vol. 101(C).
    2. Khalfaoui, Rabeh & Hammoudeh, Shawkat & Rehman, Mohd Ziaur, 2023. "Spillovers and connectedness among BRICS stock markets, cryptocurrencies, and uncertainty: Evidence from the quantile vector autoregression network," Emerging Markets Review, Elsevier, vol. 54(C).
    3. Ahelegbey, Daniel Felix & Giudici, Paolo & Mojtahedi, Fatemeh, 2021. "Tail risk measurement in crypto-asset markets," International Review of Financial Analysis, Elsevier, vol. 73(C).
    4. Fianu, Emmanuel Senyo & Ahelegbey, Daniel Felix & Grossi, Luigi, 2022. "Modeling risk contagion in the Italian zonal electricity market," European Journal of Operational Research, Elsevier, vol. 298(2), pages 656-679.
    5. Kenny S, Victoria, 2019. "The Role of Public Sector Enterprise on Economic Development: A Case Study Of The Nigerian Power Sector (1981-2015)," MPRA Paper 93291, University Library of Munich, Germany.
    6. Michail Tsagris, 2021. "A New Scalable Bayesian Network Learning Algorithm with Applications to Economics," Computational Economics, Springer;Society for Computational Economics, vol. 57(1), pages 341-367, January.
    7. Bouri, Elie & Gupta, Rangan & Hosseini, Seyedmehdi & Lau, Chi Keung Marco, 2018. "Does global fear predict fear in BRICS stock markets? Evidence from a Bayesian Graphical Structural VAR model," Emerging Markets Review, Elsevier, vol. 34(C), pages 124-142.
    8. Chen, Ren-Raw & Zhang, Xiaohu, 2024. "From liquidity risk to systemic risk: A use of knowledge graph," Journal of Financial Stability, Elsevier, vol. 70(C).
    9. Kenny S, Victoria, 2019. "Effects of Human Capital Investment on Unemployment Volatility in Nigeria (1981-2015)," MPRA Paper 93295, University Library of Munich, Germany.
    10. Daniel Felix Ahelegbey & Paolo Giudici & Fatemeh Mojtahedi, 2022. "Crypto Asset Portfolio Selection," FinTech, MDPI, vol. 1(1), pages 1-9, February.
    11. Kenny S, Victoria, 2019. "Macroeconomic Performance Indicators and Exchange Rate Misalignment in Nigeria," MPRA Paper 93292, University Library of Munich, Germany.
    12. Umut Akovali, 2020. "Beyond Connectedness: A Covariance Decomposition based Network Risk Model," Koç University-TUSIAD Economic Research Forum Working Papers 2003, Koc University-TUSIAD Economic Research Forum.
    13. Kenny S, Victoria, 2019. "The role of agricultural sector performance on economic growth in Nigeria," MPRA Paper 93132, University Library of Munich, Germany.
    14. Kenny S, Victoria, 2019. "Manufacturing Sector Performance, Exchange Rate Volatility and Inclusive Growth In Nigeria (1981-2015)," MPRA Paper 93296, University Library of Munich, Germany.
    15. Victoria S, Kenny, 2019. "Effect of Foreign Direct Investment and Economic Growth in Nigeria," MPRA Paper 92873, University Library of Munich, Germany.
    16. Teye, Alfred Larm & Ahelegbey, Daniel Felix, 2017. "Detecting spatial and temporal house price diffusion in the Netherlands: A Bayesian network approach," Regional Science and Urban Economics, Elsevier, vol. 65(C), pages 56-64.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Daniel Felix Ahelegbey, 2015. "The Econometrics of Networks: A Review," Working Papers 2015:13, Department of Economics, University of Venice "Ca' Foscari".
    2. Daniel Felix Ahelegbey & Monica Billio & Roberto Casarin, 2016. "Sparse Graphical Vector Autoregression: A Bayesian Approach," Annals of Economics and Statistics, GENES, issue 123-124, pages 333-361.
    3. Agosto, Arianna & Ahelegbey, Daniel Felix & Giudici, Paolo, 2020. "Tree networks to assess financial contagion," Economic Modelling, Elsevier, vol. 85(C), pages 349-366.
    4. Daniel Felix Ahelegbey & Luis Carvalho & Eric D. Kolaczyk, 2020. "A Bayesian Covariance Graph And Latent Position Model For Multivariate Financial Time Series," DEM Working Papers Series 181, University of Pavia, Department of Economics and Management.
    5. Nicola, Giancarlo & Cerchiello, Paola & Aste, Tomaso, 2020. "Information network modeling for U.S. banking systemic risk," LSE Research Online Documents on Economics 107563, London School of Economics and Political Science, LSE Library.
    6. Ahelegbey, Daniel Felix & Giudici, Paolo & Mojtahedi, Fatemeh, 2021. "Tail risk measurement in crypto-asset markets," International Review of Financial Analysis, Elsevier, vol. 73(C).
    7. Silva, Walmir & Kimura, Herbert & Sobreiro, Vinicius Amorim, 2017. "An analysis of the literature on systemic financial risk: A survey," Journal of Financial Stability, Elsevier, vol. 28(C), pages 91-114.
    8. Daniel Felix Ahelegbey & Paolo Giudici, 2020. "Market Risk, Connectedness and Turbulence: A Comparison of 21st Century Financial Crises," DEM Working Papers Series 188, University of Pavia, Department of Economics and Management.
    9. Ahelegbey, Daniel Felix & Giudici, Paolo & Hashem, Shatha Qamhieh, 2021. "Network VAR models to measure financial contagion," The North American Journal of Economics and Finance, Elsevier, vol. 55(C).
    10. Matteo Barigozzi & Christian Brownlees, 2019. "NETS: Network estimation for time series," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 34(3), pages 347-364, April.
    11. Ahelegbey, Daniel Felix & Billio, Monica & Casarin, Roberto, 2024. "Modeling Turning Points in the Global Equity Market," Econometrics and Statistics, Elsevier, vol. 30(C), pages 60-75.
    12. Yun, Tae-Sub & Jeong, Deokjong & Park, Sunyoung, 2019. "“Too central to fail” systemic risk measure using PageRank algorithm," Journal of Economic Behavior & Organization, Elsevier, vol. 162(C), pages 251-272.
    13. Matteo Barigozzi & Marc Hallin, 2017. "A network analysis of the volatility of high dimensional financial series," Journal of the Royal Statistical Society Series C, Royal Statistical Society, vol. 66(3), pages 581-605, April.
    14. Ellis, Scott & Sharma, Satish & Brzeszczyński, Janusz, 2022. "Systemic risk measures and regulatory challenges," Journal of Financial Stability, Elsevier, vol. 61(C).
    15. Li, Bingqing & Zhang, Xiaoyuan, 2024. "Systemic risk and financial networks," The Quarterly Review of Economics and Finance, Elsevier, vol. 94(C), pages 25-36.
    16. Matteo Barigozzi & Marc Hallin, 2015. "Networks, Dynamic Factors, and the Volatility Analysis of High-Dimensional Financial Series," Working Papers ECARES ECARES 2015-34, ULB -- Universite Libre de Bruxelles.
    17. Fianu, Emmanuel Senyo & Ahelegbey, Daniel Felix & Grossi, Luigi, 2022. "Modeling risk contagion in the Italian zonal electricity market," European Journal of Operational Research, Elsevier, vol. 298(2), pages 656-679.
    18. Casarin, Roberto & Costola, Michele & Yenerdag, Erdem, 2018. "Financial bridges and network communities," SAFE Working Paper Series 208, Leibniz Institute for Financial Research SAFE, revised 2018.
    19. Daniel Felix Ahelegbey & Monica Billio & Roberto Casarin, 2016. "Bayesian Graphical Models for STructural Vector Autoregressive Processes," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 31(2), pages 357-386, March.
    20. Andrieş, Alin Marius & Ongena, Steven & Sprincean, Nicu & Tunaru, Radu, 2022. "Risk spillovers and interconnectedness between systemically important institutions," Journal of Financial Stability, Elsevier, vol. 58(C).

    More about this item

    Keywords

    Bayesian inference; Graphical models; Model selection; Systemic risk;
    All these keywords.

    JEL classification:

    • C11 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Bayesian Analysis: General
    • C15 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Statistical Simulation Methods: General
    • C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation, Validation, and Selection
    • G01 - Financial Economics - - General - - - Financial Crises
    • G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:pra:mprapa:92634. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Joachim Winter (email available below). General contact details of provider: https://edirc.repec.org/data/vfmunde.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.