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Title: Identifying the systemically important financial communities through the weighted stochastic block model Authors:  Michele Costola - Ca' Foscari University of Venice (Italy) [presenting]
Roberto Casarin - University Ca' Foscari of Venice (Italy)
Erdem Yenerdag - Washington University in St. Louis (United States)
Abstract: Systemic risk and contagion channels of financial markets are analyzed proposing the stochastic block models (SBM) as generative models for the financial networks and exploiting the topological features of its communities. Furthermore, they propose a ranking method to identify the systemically important communities (SIC), which naturally represent the groups of financial institutions playing a central role in the vulnerability of a financial system. The empirical SBM analysis is performed on the European financial firms (active and dead) selected by the World Scope lists at daily frequency from December 1995 to January 2013. Finding shows that the number of communities tends to increase during the financial crisis which suggests the potential role of SBM communities as a new tool to be monitored by central authorities for early warning purposes.