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Clustering in Dynamic Causal Networks as a Measure of Systemic Risk on the Euro Zone

Monica Billio (), Lorenzo Frattarolo (), Hayette Gatfaoui () and Philippe de Peretti ()
Additional contact information
Lorenzo Frattarolo: University Ca' Foscari of Venice - Department of Economics, http://www.unive.it/
Philippe de Peretti: Centre d'Economie de la Sorbonne, http://centredeconomiesorbonne.univ-paris1.fr

Documents de travail du Centre d'Economie de la Sorbonne from Université Panthéon-Sorbonne (Paris 1), Centre d'Economie de la Sorbonne

Abstract: In this paper, we analyze the dynamic relationships between ten stock exchanges of the euro zone using Granger causal networks. Considering returns for which we allow the variance to follow a Markov-Switching GARCH or a Changing-Point GARCH process, we first show that over different periods, the topology of the network is highly unstable. In particular dynamic relationships vanish over very recent years. Then, expanding on this idea, we analyze patterns of information transmission within the network. Using rolling windows to study networks' topology in terms of information clustering, we find that the nodes' state changes continually. Moreover, the system exhibits periods of flickering in information tranmission. During these periods of flickering, the system also exhibits desynchronization in the information transmission process. These periods do precede tipping points or phase transitions on the market, especially before the global financial crisis, and can thus be used as early warnings. To our knowledge, this is the first time that flickering in information transmission is identified on financial markets, and that flickering is related to phase transitions

Keywords: Causal Network; Topology; Flickering; Desynchronisation; Phase transitions (search for similar items in EconPapers)
JEL-codes: C1 C4 G1 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-eec, nep-ore and nep-rmg
Date: 2016-05, Revised 2016-09
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Related works:
Working Paper: Clustering in Dynamic Causal Networks as a Measure of Systemic Risk on the Euro Zone (2016) Downloads
Working Paper: Clustering in Dynamic Causal Networks as a Measure of Systemic Risk on the Euro Zone (2016)
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Persistent link: https://EconPapers.repec.org/RePEc:mse:cesdoc:16046r

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