95 Pages Posted: 2 Feb 2017
Date Written: January 31, 2017
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
JEL Classification: C58, C31, C32, G01
Suggested Citation: Suggested Citation
Bonaccolto, Giovanni and Caporin, Massimiliano and Panzica, Roberto Calogero, Estimation and Model-Based Combination of Causality Networks (January 31, 2017). SAFE Working Paper No. 165. Available at SSRN: https://ssrn.com/abstract=2909585 or http://dx.doi.org/10.2139/ssrn.2909585