Categorical network models for systemic risk measurement

Paola Cerchiello () and Paolo Giudici

Quality & Quantity: International Journal of Methodology, 2017, vol. 51, issue 4, No 10, 1593-1609

Abstract: Abstract A very important area of financial risk management is systemic risk modelling, which concerns the estimation of the interrelationships between financial institutions, with the aim of establishing which of them are more central and, therefore, more contagious/subject to contagion. The aim of this paper is to develop a systemic risk model which, differently from existing ones, employs not only the information contained in financial market prices, but also big data coming from financial tweets. From a methodological viewpoint, we propose a new framework, based on categorical graphical models, that can estimate systemic risks with models based on two different sources: financial markets and financial tweets, and suggest a way to combine them, using a Bayesian approach. From an applied viewpoint, we present the first systemic risk model based on big data, and show that such a model can shed further light on the interrelationships between financial institutions. This can help predicting the level of returns of a bank, conditionally on the others, for example when a shock occurs in another bank.

Keywords: Financial risk management; Continuous and discrete graphical models; Twitter data analysis (search for similar items in EconPapers)
Date: 2017
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DOI: 10.1007/s11135-016-0354-x

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