2012/04 | LEM Working Paper Series | ||||||||||||||||
Post-Mortem Examination of the International Financial Network |
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Matteo Chinazzi, Giorgio Fagiolo, Javier A. Reyes, Stefano Schiavo |
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Keywords | |||||||||||||||||
financial networks, crisis, early warning systems
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JEL Classifications | |||||||||||||||||
E65, F30, G01
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Abstract | |||||||||||||||||
As the recent crisis has forcefully suggested, understanding
financial-market interconnectedness is of a paramount importance to
explain systemic risk, stability and economic dynamics. In this paper,
we address these issues along two related perspectives. First, we
explore the statistical properties of the International Financial
Network (IFN), defined as the weighted-directed multigraph where nodes
are world countries and links represent debtor-creditor relationships
in equities and short/long-run debt. We investigate whether the 2008
financial crisis has resulted in a significant change in the
topological properties of the IFN. Our findings suggest that the
crisis caused not only a reduction in the amount of securities traded,
but also induced changes in the topology of the network and in the
time evolution of its statistical properties. This has happened,
however, without changing the disassortative, core-periphery structure
of the IFN architecture. Second, we perform an econometric study to
examine the ability of network-based measures to explain cross-country
differences in crisis intensity. We investigate whether the conclusion
of previous studies showing that international connectedness is not a
relevant predictor of crisis intensity may be reversed, once one
explicitly accounts for the position of each country within the
IFN. We show that higher interconnectedness reduces the severity of
the crisis, as it allows adverse shocks to dissipate quicker. However,
the systemic risk hypothesis cannot be completely dismissed and being
central in the network, if the node is not a member of a rich club,
puts the country in an adverse and risky position in times of
crises. Finally, we find strong evidence of nonlinear effects, once
the high degree of heterogeneity that characterizes the IFN is taken
into account.
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