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Compound poisson models for weighted networks with applications in finance

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  • Gandy, Axel
  • Veraart, Luitgard A. M.

Abstract

We develop a modelling framework for estimating and predicting weighted network data. The edge weights in weighted networks often arise from aggregating some individual relationships be- tween the nodes. Motivated by this, we introduce a modelling framework for weighted networks based on the compound Poisson distribution. To allow for heterogeneity between the nodes, we use a regression approach for the model parameters. We test the new modelling framework on two types of financial networks: a network of financial institutions in which the edge weights represent exposures from trading Credit Default Swaps and a network of countries in which the edge weights represent cross-border lending. The compound Poisson Gamma distributions with regression fit the data well in both situations. We illustrate how this modelling framework can be used for predicting unobserved edges and their weights in an only partially observed network. This is for example relevant for assessing systemic risk in financial networks.

Suggested Citation

  • Gandy, Axel & Veraart, Luitgard A. M., 2021. "Compound poisson models for weighted networks with applications in finance," LSE Research Online Documents on Economics 104185, London School of Economics and Political Science, LSE Library.
    • Handle: RePEc:ehl:lserod:104185
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    File URL: http://eprints.lse.ac.uk/104185/
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    References listed on IDEAS

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    Cited by:

    1. Domenico Di Gangi & Giacomo Bormetti & Fabrizio Lillo, 2022. "Score Driven Generalized Fitness Model for Sparse and Weighted Temporal Networks," Papers 2202.09854, arXiv.org, revised Mar 2022.

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    More about this item

    Keywords

    eighted directed networks; compound Poisson distribution; regression; subnetwork prediction; financial networks; systemic risk;
    All these keywords.

    JEL classification:

    • C02 - Mathematical and Quantitative Methods - - General - - - Mathematical Economics
    • C46 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics - - - Specific Distributions
    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods
    • D85 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Network Formation
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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