Estimation and model-based combination of causality networks
Massimiliano Caporin () and
Roberto Calogero Panzica
No 165, SAFE Working Paper Series from Research Center SAFE - Sustainable Architecture for Finance in Europe, Goethe University Frankfurt
Causality is a widely-used concept in theoretical and empirical economics. The recent financial economics literature has used Granger causality to detect the presence of contemporaneous links between financial institutions and, in turn, to obtain a network structure. Subsequent studies combined the estimated networks with traditional pricing or risk measurement models to improve their fit to empirical data. In this paper, we provide two contributions: we show how to use a linear factor model as a device for estimating a combination of several networks that monitor the links across variables from different viewpoints; and we demonstrate that Granger causality should be combined with quantile-based causality when the focus is on risk propagation. The empirical evidence supports the latter claim.
Keywords: granger causality; quantile causality; multi-layer network; network combination (search for similar items in EconPapers)
JEL-codes: C58 C31 C32 G01 (search for similar items in EconPapers)
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:safewp:165
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