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Tree Networks to Assess Financial Contagion

Daniel Felix Ahelegbey () and Paolo Giudici ()

MPRA Paper from University Library of Munich, Germany

Abstract: We proposes a two-layered tree network model that decomposes financial contagion into a global component, composed of inter-country contagion effects, and a local component, made up of inter-institutional contagion channels. The model is effectively applied to a database containing time series of daily CDS spreads of major European financial institutions (banks and insurance companies), and reveals the importance monitoring both channels to assess financial contagion. The empirical application revealed evidence of a high inter-country and inter-institutional vulnerability at the onset of the global financial crisis in 2008 and during the sovereign crisis in 2011. The result further identifies Belgium and France as central to the inter-country contagion in the Euro area during the financial crisis, while Italy dominated during the sovereign crisis. The French corporates Groupama, Credit Industriel and Caisse d'Epargne were central in the inter-institutional contagion in both crises.

Keywords: Financial Crisis; Graphical Lasso; Inter-Country Contagion; Inter-Institutional Contagion; Sovereign Crisis; Sparse Covariance Selection (search for similar items in EconPapers)
JEL-codes: C38 G01 G2 (search for similar items in EconPapers)
Date: 2019-01-28
New Economics Papers: this item is included in nep-eec and nep-ias
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