A Network Approach to Volatility Diffusion and Forecasting in Global Financial Markets

Matteo Orlandini, Sebastiano Michele Zema, Mauro Napoletano and Giorgio Fagiolo
Additional contact information
Matteo Orlandini: Université Côte d'Azur, CNRS, GREDEG, France
Sebastiano Michele Zema: Scuola Normale Superiore, Italy
Mauro Napoletano: Université Côte d'Azur, CNRS, GREDEG, France
Giorgio Fagiolo: Institute of Economics, Scuola Superiore Sant'Anna, Italy

No 2025-19, GREDEG Working Papers from Groupe de REcherche en Droit, Economie, Gestion (GREDEG CNRS), Université Côte d'Azur, France

Abstract: The node degree distribution of an inferred financial network is often characterized by a small number of nodes with a large number of connections and many nodes with few connections. To date, there is no empirical evidence on how this stylized statistical fact can be useful in predicting fluctuations of financial assets. In this paper, we explore this possibility by modifying well-known time-series models and augmenting them with covariates from a reconstructed network, selecting nodes that are identified as the most connected to the index of interest. We then analyze the out-of-sample performance of these models across different volatility proxies. The results show that nodes belonging to the right tail of the degree distribution possess high predictive power over financial aggregates, independently of the volatility measure used. Our findings suggest that incorporating the topological information that arises from this statistical regularity in financial networks can enhance the accuracy of traditional predictive models.

Keywords: Volatility forecasting; Network-augmented models; Cross-border volatility spillovers; Equity indexes (search for similar items in EconPapers)
JEL-codes: G11 G17 (search for similar items in EconPapers)
Pages: 26 pages
Date: 2025-05
New Economics Papers: this item is included in nep-for and nep-net
References: Add references at CitEc
Citations:

Downloads: (external link)
http://195.220.190.85/GREDEG-WP-2025-19.pdf First 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:gre:wpaper:2025-19

Access Statistics for this paper

More papers in GREDEG Working Papers from Groupe de REcherche en Droit, Economie, Gestion (GREDEG CNRS), Université Côte d'Azur, France Contact information at EDIRC.
Bibliographic data for series maintained by Patrice Bougette ().