Influential Risk Spreaders and Systemic Risk in Indian Financial Networks: Evidence from Gravity Centrality Approach

Abstract

This paper studies the risk spreading ability of financial institutions and their contribution to the systemic risk in Indian financial system. Gravity centrality models are employed to measure the risk spreading ability of the financial institutions both in depth and breadth and from the perspective of local and global information. We measure systemic risk contribution via ∆CoVaR and MES and also assess the dynamic evolution of systemic risk of these financial institutions over time. Using two variants of the gravity centrality models, we identify the influential risk spreaders in Indian financial networks and establish the relationship between the risk spreading ability and the systemic risk contribution of these institutions. Our findings show that both the variants of the gravity centrality model have a significant performance on identifying influential risk spreaders and financial institutions with larger risk spreading ability contribute more to the systemic risk. Further findings suggest that the COVID-19 pandemic has enhanced the contribution of influential risk spreaders to the systemic risk.

Keywords: Systemic Risk, Financial Crisis, Networks, Gravity Centrality

JEL Classification: G32, G01, C21