Connecting the Dots: Econometric Methods for Uncovering Networks with an Application to the Australian Financial Institutions

37 Pages Posted: 6 Feb 2015 Last revised: 6 May 2016

See all articles by Mikhail Anufriev

Mikhail Anufriev

University of Technology Sydney (UTS)

Valentyn Panchenko

UNSW Business School, Economics, University of New South Wales

Date Written: January 29, 2015

Abstract

This paper connects variance-covariance estimation methods, Gaussian graphical models, and the growing literature on economic and financial networks. We construct the network using the concept of partial correlations which captures direct linear dependence between any two entities, conditional on dependence between all other entities. We relate the centrality measures of this network to shock propagation. The methodology is applied to construct the perceived network of the publicly traded Australian banks and their connections to the domestic financial sector, real economy, and international markets. We find strong links between the big four Australian banks, the financial services sector and the other sectors of the economy and determine which entities play a central role in transmitting and absorbing the shocks.

Suggested Citation

Anufriev, Mikhail and Panchenko, Valentyn, Connecting the Dots: Econometric Methods for Uncovering Networks with an Application to the Australian Financial Institutions (January 29, 2015). Journal of Banking and Finance, 61, S214-S255, 2015, CIFR Paper No. 54/2015, Available at SSRN: https://ssrn.com/abstract=2560594 or http://dx.doi.org/10.2139/ssrn.2560594

Mikhail Anufriev

University of Technology Sydney (UTS) ( email )

P. O. Box 123
Broadway, NSW 2007
Australia

Valentyn Panchenko (Contact Author)

UNSW Business School, Economics, University of New South Wales ( email )

Sydney, NSW 2052
Australia

HOME PAGE: http://research.economics.unsw.edu.au/vpanchenko

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