Interbank network reconstruction enforcing density and reciprocity

Valentina Macchiati, Piero Mazzarisi and Diego Garlaschelli

Chaos, Solitons & Fractals, 2024, vol. 186, issue C

Abstract: Networks of financial exposures are the key propagators of risk and distress among banks, but their empirical structure is not publicly available because of confidentiality. This limitation has triggered the development of methods of network reconstruction from partial, aggregate information. Unfortunately, even the best methods available fail in replicating the number of directed cycles, which on the other hand play a crucial role in determining graph spectra and hence the degree of network stability and systemic risk. Here we address this challenge by exploiting the hypothesis that the statistics of higher-order cycles is strongly constrained by that of the shortest ones, i.e. by the amount of dyads with reciprocated links. First, we provide a detailed analysis of link reciprocity on the e-MID dataset of Italian banks, finding that correlations between reciprocal links systematically increase with the temporal resolution, typically changing from negative to positive around a timescale of up to 50 days. Then, we propose a new network reconstruction method capable of enforcing, only from the knowledge of aggregate interbank assets and liabilities, both a desired sparsity and a desired link reciprocity. We confirm that the addition of reciprocity dramatically improves the prediction of several structural and spectral network properties, including the largest real eigenvalue and the eccentricity of the elliptical distribution of the other eigenvalues in the complex plane. These results illustrate the importance of correctly addressing the temporal resolution and the resulting level of reciprocity in the reconstruction of financial networks.

Keywords: Financial networks; Network reconstruction; Systemic risk; Spectral properties (search for similar items in EconPapers)
Date: 2024
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Persistent link: https://EconPapers.repec.org/RePEc:eee:chsofr:v:186:y:2024:i:c:s0960077924008312

DOI: 10.1016/j.chaos.2024.115279

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