Clustering in Dynamic Causal Networks as a Measure of Systemic Risk on the Euro Zone

CES Working Paper 2016.46

30 Pages Posted: 31 Oct 2016 Last revised: 28 Nov 2016

See all articles by Monica Billio

Monica Billio

University of Venice - Department of Economics; Ca Foscari University of Venice - Dipartimento di Economia

Lorenzo Frattarolo

European Commission-Joint Research Centre

Hayette Gatfaoui

IESEG School of Management (Paris campus); IESEG School of Management and LEM member - UMR 9221; Lille Economy and Management (LEM), UMR 9221

Philippe de Peretti

Université Paris I Panthéon-Sorbonne - Centre d'Economie de la Sorbonne (CES)

Date Written: September 27, 2016

Abstract

In this paper, we analyze the dynamic relationships between ten stock exchanges of the euro zone using Granger causal networks. Using returns for which we allow the variance to follow a Markov-Switching GARCH or a Changing-Point GARCH, we first show that over different periods, the topology of the network is highly unstable. In particular, over very recent years, dynamic relationships vanish. Then, expanding on this idea, we analyze patterns of information transmission. Using rolling windows to analyze the topologies of the network in terms of clustering, we show that the nodes' state changes continually, and that the system exhibits a high degree of flickering in information transmission. During periods of flickering, the system also exhibits desynchronization in the information transmission process. These periods do precede tipping points or phase transitions on the market, especially before the global financial crisis, and can thus be used as early warnings of phase transitions. To our knowledge, this is the first time that flickering clusters are identified on financial markets, and that flickering is related to phase transitions.

Keywords: Causal Network, Topology, Custering, Flickering, Desynchronisation, Phase transitions

JEL Classification: C18, D85, G01

Suggested Citation

Billio, Monica and Billio, Monica and Frattarolo, Lorenzo and Gatfaoui, Hayette and Gatfaoui, Hayette and de Peretti, Philippe, Clustering in Dynamic Causal Networks as a Measure of Systemic Risk on the Euro Zone (September 27, 2016). CES Working Paper 2016.46, Available at SSRN: https://ssrn.com/abstract=2861266 or http://dx.doi.org/10.2139/ssrn.2861266

Monica Billio

Ca Foscari University of Venice - Dipartimento di Economia ( email )

Cannaregio 873
Venice, 30121
Italy

HOME PAGE: http://www.unive.it/persone/billio

University of Venice - Department of Economics ( email )

Fondamenta San Giobbe 873
Venezia 30121
Italy
+39 041 234 9170 (Phone)
+39 041 234 9176 (Fax)

Lorenzo Frattarolo

European Commission-Joint Research Centre ( email )

Joint Research Centre, European Commission, Rue du
Brussels, Brussels 1050
Belgium

Hayette Gatfaoui (Contact Author)

IESEG School of Management (Paris campus) ( email )

Socle de la Grande Arche
1 Parvis de La Defense
Paris La Defense, Paris La Defense 92044
France
0033 1 5591 1010 (Phone)

HOME PAGE: http://www.ieseg.fr/enseignants-et-recherche/enseignant/?id=2443

IESEG School of Management and LEM member - UMR 9221 ( email )

Socle de la Grande Arche
1 Parvis de La Defense
Paris La Defense, Paris La Defense 92044
France
0033 1 5591 1010 (Phone)

HOME PAGE: http://www.ieseg.fr/enseignants-et-recherche/enseignant/?id=2443

Lille Economy and Management (LEM), UMR 9221 ( email )

Lille
France
00 33 (0)3 20 13 40 66 (Phone)
00 33 (0)3 20 13 40 70 (Fax)

HOME PAGE: http://lem.cnrs.fr/

Philippe De Peretti

Université Paris I Panthéon-Sorbonne - Centre d'Economie de la Sorbonne (CES) ( email )

106-112 Boulevard de l'hopital
106-112 Boulevard de l'Hôpital
Paris Cedex 13, 75647
France

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