Estimating Financial Networks by Realized Interdependencies: A Restricted Autoregressive Approach

42 Pages Posted: 9 Apr 2021

See all articles by Massimiliano Caporin

Massimiliano Caporin

University of Padua - Department of Statistical Sciences

Deniz Erdemlioglu

IESEG School of Management, Department of Finance, LEM-CNRS 9221, France

Stefano Nasini

Catholic University of Lille - IÉSEG School of Management, Lille Campus

Date Written: April 7, 2021

Abstract

We develop a network-based vector autoregressive approach to uncover the interactions among
financial assets by integrating multiple realized measures based on high-frequency data. Under
a restricted parameter structure, our approach allows the capture of cross-sectional and time ependencies embedded in a large panel of assets through the decomposition of these two blocks of
dependencies. We propose a block coordinate descent (BCD) procedure for the least square estimation and investigate its theoretical properties. By integrating realized returns, realized volume, and realized volatilities of 1095 individual U.S. stocks over fifteen years, we illustrate that our approach identifies a large array of interdependencies with a limited computational effort. As a direct consequence of the estimated model, we provide a new ranking for the systemically important financial institutions (SIFIs) and carry out an impulse-response analysis to quantify the effects of adverse shocks on the financial system.

Keywords: Financial networks, Financial interconnectedness, High-dimensional VARs, Realized volatility, Stock market, High-frequency data

JEL Classification: C10, C13, C32, C33, C55, C58, G10, G20

Suggested Citation

Caporin, Massimiliano and Erdemlioglu, Deniz and Nasini, Stefano, Estimating Financial Networks by Realized Interdependencies: A Restricted Autoregressive Approach (April 7, 2021). Available at SSRN: https://ssrn.com/abstract=3821566 or http://dx.doi.org/10.2139/ssrn.3821566

Massimiliano Caporin (Contact Author)

University of Padua - Department of Statistical Sciences ( email )

Via Battisti, 241
Padova, 35121
Italy

Deniz Erdemlioglu

IESEG School of Management, Department of Finance, LEM-CNRS 9221, France ( email )

3 rue de la Digue
Lille, 59000
France

HOME PAGE: http://www.denizerdemlioglu.com

Stefano Nasini

Catholic University of Lille - IÉSEG School of Management, Lille Campus ( email )

Socle de la Grande Arche
1 Parvis de la Defense
Lille, Lille 59000
France

HOME PAGE: http://https://www.ieseg.fr/

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