A Bayesian Covariance Graph And Latent Position Model For Multivariate Financial Time Series
Daniel Felix Ahelegbey (),
Luis Carvalho and
Eric D. Kolaczyk
Additional contact information
Luis Carvalho: Boston University
Eric D. Kolaczyk: Boston University
No 181, DEM Working Papers Series from University of Pavia, Department of Economics and Management
Current understanding holds that financial contagion is driven mainly by system-wide interconnectedness of institutions. A distinction has been made between systematic and idiosyncratic channels of contagion, with shocks transmitted through the latter expected to be substantially more likely to lead to a crisis than through the former. Idiosyncratic connectivity is thought to be driven not simply by obviously shared characteristics among institutions, but more by the latent strategic position of ?rms in ?nancial markets. We propose a Bayesian hierarchical model for multivariate ?nancial time series that characterizes the interdependence in the idiosyncratic factors of a VAR model via a covariance graphical model whose structure is modeled through a latent position model. We develop an efficient algorithm that samples the network of the idiosyncratic factors and the latent positions underlying the network. We examine the dynamic volatility network and latent positions among 150 publicly listed institutions across the United States and Europe and how they contribute to systemic vulnerabilities and risk transmission.
Keywords: Bayesian inference; Covariance graph model; Idiosyncratic Contagion Channels; Latent Space Models; Systemic Risk; VAR (search for similar items in EconPapers)
JEL-codes: C11 C15 C51 C55 G01 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ecm and nep-net
References: View references in EconPapers View complete reference list from CitEc
Citations: Track citations by RSS feed
Downloads: (external link)
This item may be available elsewhere in EconPapers: Search for items with the same title.
Export reference: BibTeX
RIS (EndNote, ProCite, RefMan)
Persistent link: https://EconPapers.repec.org/RePEc:pav:demwpp:demwp0181
Access Statistics for this paper
More papers in DEM Working Papers Series from University of Pavia, Department of Economics and Management Contact information at EDIRC.
Bibliographic data for series maintained by Alice Albonico (). This e-mail address is bad, please contact .