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Financial network structure and systemic risk

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  • Chuangxia Huang
  • Yanchen Deng
  • Xiaoguang Yang
  • Yaqian Cai
  • Xin Yang

Abstract

For systemic risk, the impact of the financial network's characteristics remains imperfectly understood at best, even if the view that network structure is closely related to systemic risk has become a broad consensus. By choosing S&P 500 constituents as the research sample, we investigate the structural characteristics of the Engle-Granger networks and explore the impact of network centrality on one-quarter-ahead systemic risk. We find that a firm's network centrality is positively related to both dimensions of its systemic risk (i.e. the firm's vulnerability to, and contribution to, system-wide downturns). The results remain robust after we consider the potential endogeneity and various sensitivity checks. An examination of potential channels reveals that centrally located firms in the network have a high extent of co-movement with the market, and are likely to trigger systemic market failures caused by stock price crashes in clusters once they fall into a downturn. We further show that the positive relation between network centrality and future systemic risk is more salient for financial firms and more pronounced during recessions.

Suggested Citation

  • Chuangxia Huang & Yanchen Deng & Xiaoguang Yang & Yaqian Cai & Xin Yang, 2024. "Financial network structure and systemic risk," The European Journal of Finance, Taylor & Francis Journals, vol. 30(10), pages 1073-1096, July.
    • Handle: RePEc:taf:eurjfi:v:30:y:2024:i:10:p:1073-1096
    DOI: 10.1080/1351847X.2023.2269993
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