Compound Poisson Models for Weighted Networks with Applications in Finance

22 Pages Posted: 18 Jun 2019 Last revised: 29 Apr 2020

See all articles by Axel Gandy

Axel Gandy

Imperial College London - Department of Mathematics

Luitgard Anna Maria Veraart

London School of Economics & Political Science (LSE) - Department of Mathematics

Date Written: April 13, 2020

Abstract

We develop a modelling framework for estimating and predicting weighted network data. The edge weights in weighted networks often arise from aggregating some individual relationships between the nodes. Motivated by this, we introduce a modelling framework for weighted networks based on the compound Poisson distribution. To allow for heterogeneity between the nodes, we use a regression approach for the model parameters. We test the new modelling framework on two types of financial networks: a network of financial institutions in which the edge weights represent exposures from trading Credit Default Swaps and a network of countries in which the edge weights represent cross-border lending. The compound Poisson Gamma distributions with regression fit the data well in both situations. We illustrate how this modelling framework can be used for predicting unobserved edges and their weights in an only partially observed network. This is for example relevant for assessing systemic risk in financial networks.

Keywords: Weighted directed networks, compound Poisson distribution, regression, subnetwork prediction, financial networks, systemic risk

JEL Classification: C02, C46, C53, D85, G32

Suggested Citation

Gandy, Axel and Veraart, Luitgard Anna Maria, Compound Poisson Models for Weighted Networks with Applications in Finance (April 13, 2020). Available at SSRN: https://ssrn.com/abstract=3401059 or http://dx.doi.org/10.2139/ssrn.3401059

Axel Gandy

Imperial College London - Department of Mathematics ( email )

South Kensington Campus
Imperial College
LONDON, SW7 2AZ
United Kingdom

Luitgard Anna Maria Veraart (Contact Author)

London School of Economics & Political Science (LSE) - Department of Mathematics ( email )

Houghton Street
GB-London WC2A 2AE
United Kingdom

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