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Causal analysis of extreme risk in a network of industry portfolios

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  • Claudia Kluppelberg
  • Mario Krali

Abstract

We present a methodology for causal risk analysis in a network. Causal dependence is formulated by a max-linear structural equation model, which expresses each node variable as a max-linear function of its parental node variables in a directed acyclic graph and some exogenous innovation. We determine directed~paths~responsible~for extreme risk propagation in the network. We give algorithms for structure learning and parameter estimation and apply them to a network of financial data.

Suggested Citation

  • Claudia Kluppelberg & Mario Krali, 2025. "Causal analysis of extreme risk in a network of industry portfolios," Papers 2504.00523, arXiv.org.
    • Handle: RePEc:arx:papers:2504.00523
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    File URL: http://arxiv.org/pdf/2504.00523
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