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Early warning model based on correlated networks in global crude oil markets

Jia-Wei Yu, Wen-Jie Xie and Zhi-Qiang Jiang

Physica A: Statistical Mechanics and its Applications, 2018, vol. 490, issue C, 1335-1343

Abstract: Applying network tools on predicting and warning the systemic risks provides a novel avenue to manage risks in financial markets. Here, we construct a series of global crude oil correlated networks based on the historical 57 oil prices covering a period from 1993 to 2012. Two systemic risk indicators are constructed based on the density and modularity of correlated networks. The local maximums of the risk indicators are found to have the ability to predict the trends of oil prices. In our sample periods, the indicator based on the network density sends five signals and the indicator based on the modularity index sends four signals. The four signals sent by both indicators are able to warn the drop of future oil prices and the signal only sent by the network density is followed by a huge rise of oil prices. Our results deepen the application of network measures on building early warning models of systemic risks and can be applied to predict the trends of future prices in financial markets.

Keywords: Systemic risk; Early warning model; Network density; Modularity (search for similar items in EconPapers)
Date: 2018
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Handle: RePEc:eee:phsmap:v:490:y:2018:i:c:p:1335-1343