Systemic Risk Management via Maximum Independent Set in Extremal Dependence Networks

Qian Hui and Tiandong Wang

Papers from arXiv.org

Abstract: The failure of key financial institutions may accelerate risk contagion due to their interconnections within the system. In this paper, we propose a robust portfolio strategy to mitigate systemic risks during extreme events. We use the stock returns of key financial institutions as an indicator of their performance, apply extreme value theory to assess the extremal dependence among stocks of financial institutions, and construct a network model based on a threshold approach that captures extremal dependence. Our analysis reveals different dependence structures in the Chinese and U.S. financial systems. By applying the maximum independent set (MIS) from graph theory, we identify a subset of institutions with minimal extremal dependence, facilitating the construction of diversified portfolios resilient to risk contagion. We also compare the performance of our proposed portfolios with that of the market portfolios in the two economies.

Date: 2025-03
References: Add references at CitEc
Citations:

Downloads: (external link)
http://arxiv.org/pdf/2503.15534 Latest version (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:arx:papers:2503.15534

Access Statistics for this paper

More papers in Papers from arXiv.org
Bibliographic data for series maintained by arXiv administrators ().