An analysis of systemic risk in worldwide economic sentiment indices

Lux, Thomas; Luu, Duc Thi; Yanovski, Boyan

doi:10.1007/s10663-019-09464-3

Cited by 10 publications

(10 citation statements)

References 38 publications

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“…However, in the presence of outliers observations in the empirical data, the empirical largest eigenvalue may significantly exceed the Marchenko-Pastur upper bound (Biroli et al, 2007;Bouchaud and Potters, 2009;Lux et al, 2019). In particular, if the largest absolute value of the empirical observations X and defined by max(|x i,j |) = S is larger than (N T ) 1 4 , the upper limit defined by the Marchenko-Pastur law shall be adjusted as follows:…”

Section: Methodsmentioning

confidence: 99%

“…In this paper we contribute to the above debate by means of a novel econometric procedure that allows one to identify and easily quantify synchronization patterns across European economies. More precisely, we employ the methods of Random Matrix Theory (RMT), a technique introduced by Wigner (1955) that it has recently gained success in the finance literature for performing empirical analyses upon assets cross-correlations and portfolios overlaps (Wang et al, 2011;Bun et al, 2017;Lux et al, 2019). The RMT technique has commonalities with Principal Component Analysis (PCA) and with Dynamic Factor (DF) models (see e.g.…”

Section: Introductionmentioning

confidence: 99%

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Synchronization patterns in the European Union

2022

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We propose a novel approach to investigate the synchronization of business cycles and we apply it to a Eurostat database of manufacturing industrial production time-series in the European Union (EU) over the 2000-2017 period. Our approach exploits Random Matrix Theory and extracts the latent information contained in a balanced panel data by cleaning it from possible spurious correlation. We employ this method to study the synchronization among different countries over time. Our empirical exercise tracks the evolution of the European synchronization patterns and identifies the emergence of synchronization clusters among different EU economies. We find that synchronization in the Euro Area increased during the first decade of the century and that it reached a peak during the Great Recession period. It then decreased in the aftermath of the crisis, reverting to the levels observable at the beginning of the 21st century. Second, we show that the asynchronous business cycle dynamics at the beginning of the century was structured along a East-West axis, with eastern European countries having a diverging business cycle dynamics with respect to their western partners. The recession brought about a structural transformation of business cycles co-movements in Europe. Nowadays the divide can be identified along the North vs. South axis. This recent surge in asynchronization might be harmful for the European Unio because it implies countries' heterogeneous responses to common policies.

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Section: Methodsmentioning

confidence: 99%

Section: Introductionmentioning

confidence: 99%

Synchronization patterns in the European Union

2022

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“…Recently, RMT has been used to study synchronizations between different macroeconomic indicators (e.g. Ormerod and Mounfield 2000;Ormerod 2008;Iyetomi et al 2011;Yoshikawa et al 2015;Lux et al 2020). Indeed, the applications of RMT to the spectral analysis of various types of complex networks have also received considerable attention in related literature (Bandyopadhyay and Jalan 2007;de Carvalho et al 2009;Potestio et al 2009;Jalan 2009;Tran et al 2013;Dumitriu and Johnson 2016), but to the best of our knowledge none of them has studied the spectral properties of cross-correlations between nodes in one set in the formation of links or the strength of interactions with nodes in another set (e.g.…”

Section: Introductionmentioning

confidence: 99%

“…In addition, building Planar Maximally Filtered Graphs (PMFG) (Tumminello et al 2005;Pozzi et al 2008;Di Matteo et al 2010) from the correlation structure for different eigenmodes, we also analyse the network structure of correlations and investigate how this network changes in different periods. Furthermore, to infer systemic risk arising from credit extensions from banks to firms, we measure the absorption ratios that capture the fraction of the total variance explained by a finite number of the first principal components (Kritzman et al 2011;Billio et al 2012;Zheng et al 2012;Lux et al 2020). It should be emphasized that the procedure used in the present paper can be employed to filter noise signals and extract significant patterns out of different large bipartite networks including those in economics and finance such as bank-borrower credit networks, investor-asset networks.…”

Section: Introductionmentioning

confidence: 99%

Portfolio Correlations in the Bank-Firm Credit Market of Japan

Luu¹

2021

Comput Econ

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The recent global financial crisis has shown portfolio correlations between agents as one of the major channels of risk contagion and amplification. In this work, we analyse the structure and dynamics of the cross-correlation matrix of banks’ loan portfolios in the yearly bank-firm credit network of Japan during the period from 1980 to 2012. Using the methods of Random Matrix Theory (RMT), Principal Component Analysis and complex networks, we aim to detect non-random patterns in the empirical cross-correlations as well as to identify different states of such correlations over time. Our findings suggest that although a majority of portfolio correlations between banks in lending relations to firms are contributed by noise, the top largest eigenvalues always deviate from the random bulk explained by RMT, indicating the presence of non-random patterns governing the correlation dynamics. In particular, we show that this dynamics is mainly driven by a global common factor and a couple of “groups” factors. Furthermore, different states in the credit market can be identified based on the evolution of eigenvalues and associated eigenvectors. For example, during the asset price bubble period in Japan from 1986 to 1991, we find that banks’ loan portfolios tend to be more correlated, showing a significant increase in the level of systemic risk in the credit market. In addition, building Planar Maximally Filtered Graphs from the correlations of different eigenmodes, notably, we observe that the local interaction structure between banks changes in different periods. Typically, when the dominance of a group of banks in one period gradually vanishes, the credit market starts to build-up a different structure in the next period in which another group of banks will become the main actors in the backbone of the cross-correlations.

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“…In the first stage, the Business Confidence Index is used as an indicator that contains the expectations of four productive sectors: Construction, Industry, Commerce, and Services (Ochoa-Rico et al 2022). Therefore, it is estimated that every month, this index gathers the opinion on the present and future of entrepreneurs on issues related to variations in sales, production, hiring of employees, inventory level, input prices, and perspectives of the business situation (Lux et al 2020). This index meets the expectations of the Ecuadorian business sector.…”

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confidence: 99%

The Internal and External Factors That Determined Private Investment in Ecuador 2007–2020

2022

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This article studies how electoral processes and internal factors of the Ecuadorian economy affect the dynamics of the country’s business expectations. The hypothesis that the free market and socialist political models in an economy generate different reactions in the expectations of the agents, according to the prevailing macroeconomic context, is tested. The empirical analysis is based on time series tools on quarterly data between 2006 and 2021. The results show that the dynamics of investment adjustment to the relationships of internal factors, electoral processes, and other variables explain 84% of this behavior. This is more accelerated in political contexts that promote the free market and maintain social, political, and economic stability, showing an overreaction of agents to negative economic news following the loss-aversion hypothesis.

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An analysis of systemic risk in worldwide economic sentiment indices

Cited by 10 publications

References 38 publications

Synchronization patterns in the European Union

Synchronization patterns in the European Union

Portfolio Correlations in the Bank-Firm Credit Market of Japan

The Internal and External Factors That Determined Private Investment in Ecuador 2007–2020

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