Systemic Centrality and Systemic Communities in Financial Networks

Quantitative Finance and Economics 2 (2), pp. 468-496 (2018).

29 Pages Posted: 21 Jul 2019

See all articles by Jorge A. Chan-Lau

Jorge A. Chan-Lau

International Monetary Fund (IMF) - International Capital Markets Department; National University of Singapore (NUS) - Risk Management Institute; Tufts University - Fletcher School of Law and Diplomacy

Date Written: June 13, 2018

Abstract

A systemically important firm could be too-connected-to-fail and/or too-important-to-fail, two properties which centrality measures and community detection methods can capture respectively. This paper examines the performance of these measures in a variance decomposition global financial network. Too-connected-to-fail risk and vulnerability rankings are quite robust to the choice of centrality measure. The PageRank centrality measure, however, does not seem as suitable for assessing vulnerabilities. Two community identification methods, edge betweenness and the map equation (Infomap) were used to identify systemic communities, which in turn capture the too-important-to-fail dimension of systemic risk. The first method appears more robust to different weighting schemes but tends to isolate too many firms. The second method exhibits the opposite characteristics. Overall, the analysis suggests that centrality measures and community identification methods complement each other for assessing systemic risk in financial networks.

Keywords: centrality, community detection, edge-betweenness, financial network, map equation, power law, systemic risk

JEL Classification: G1, D85, G31

Suggested Citation

Chan-Lau, Jorge Antonio, Systemic Centrality and Systemic Communities in Financial Networks (June 13, 2018). Quantitative Finance and Economics 2 (2), pp. 468-496 (2018)., Available at SSRN: https://ssrn.com/abstract=3422808 or http://dx.doi.org/10.2139/ssrn.3422808

Jorge Antonio Chan-Lau (Contact Author)

International Monetary Fund (IMF) - International Capital Markets Department ( email )

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Washington, DC 20431
United States

National University of Singapore (NUS) - Risk Management Institute ( email )

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Singapore, 119613
Singapore

Tufts University - Fletcher School of Law and Diplomacy ( email )

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Medford, MA 02155
United States

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