Post-mortem examination of the international financial network

Abstract

Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. www.econstor.eu As the recent crisis has forcefully suggested, understanding financial-market interconnectedness is of a paramount importance to explain systemic risk, stability and economic dynamics. In this paper, we address these issues along two related perspectives. First, we explore the statistical properties of the International Financial Network (IFN), defined as the weighted-directed multigraph where nodes are world countries and links represent debtor-creditor relationships in equities and short/long-run debt. We investigate whether the 2008 financial crisis has resulted in a significant change in the topological properties of the IFN. Our findings suggest that the crisis caused not only a reduction in the amount of securities traded, but also induced changes in the topology of the network and in the time evolution of its statistical properties. This has happened, however, without changing the disassortative, core-periphery structure of the IFN architecture. Second, we perform an econometric study to examine the ability of network-based measures to explain crosscountry differences in crisis intensity. We investigate whether the conclusion of previous studies showing that international connectedness is not a relevant predictor of crisis intensity may be reversed, once one explicitly accounts for the position of each country within the IFN. We show that higher interconnectedness reduces the severity of the crisis, as it allows adverse shocks to dissipate quicker. However, the systemic risk hypothesis cannot be completely dismissed and being central in the network, if the node is not a member of a rich club, puts the country in an adverse and risky position in times of crises. Finally, we find strong evidence of nonlinear effects, once the high degree of heterogeneity that characterizes the IFN is taken into account. Terms of use: Documents in

Interconnectedness of the banking sector as a vulnerability to crises

“…In Model 6, the relative usefulness improves further but does not reach same levels as the macronetwork in Table 2. We interpret this as an indication of the macronetwork as a more comprehensive characterization of the interconnectedness (or position) of a banking sector than if one considers solely the network of banking sectors (Chinazzi et al, 2013;Minoiu & Reyes, 2013). By definition, it allows for more channels of vulnerability and provides an explicit characterization of the closeness of the banking sector to the real economy (e.g., households and NFC) that could potentially increase the likelihood of banking distress becoming systemic.…”

“…Caballero (2015) investigates the level of financial integration measured in the global banking network, using detailed information on bank exposures in the syndicated loan market, as determinants of bank crises. Chinazzi, Fagiolo, Reyes, and Schiavo (2013) relate the 2008-2009 crisis to a global banking network built with data on cross-border portfolio investment holdings. In a similar vein, Minoiu, Kang, Subrahmanian, and Berea (2015) show the usefulness of network measures, computed over the web of international banking exposures (the BIS bilateral locational statistics), for crisis prediction.…”

Towards a Proper Assignment of Systemic Risk: The Combined Roles of Network Topology and Shock Characteristics

“…The baseline discussion here is on the effects of network connectivity on its shock resistance. On one hand, higher interconnectedness can reduce the probability of default, as it allows adverse shocks to dissipate quicker [7,8]. Higher interconnectedness, on the other hand, results in larger effects once the shock size has crossed a critical threshold.…”

A network visualization approach and global stock market integration

“…They further suggest that a high correlation in the financial network helps the country to recover from a crisis. Chinazzi, Fagiolo, Reyes, and Schiavo (2013) examine the topological properties of an international financial network (IFN) using data that include cross-border portfolio investment holdings of equity securities, long-term debt securities, and short-term debt securities listed by 70 countries of residence of issuers, for the period from 2001 to 2010 using data collected by International Monetary Fund. The authors build five different layers of networks based on their various sets of data and then visualize the networks by using countries as nodes and the weighted value of securities from issuers to holders as direct links between two nodes.…”