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Estimation and model-based combination of causality networks

Author

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  • Bonaccolto, Giovanni
  • Caporin, Massimiliano
  • Panzica, Roberto Calogero

Abstract

Causality is a widely-used concept in theoretical and empirical economics. The recent financial economics literature has used Granger causality to detect the presence of contemporaneous links between financial institutions and, in turn, to obtain a network structure. Subsequent studies combined the estimated networks with traditional pricing or risk measurement models to improve their fit to empirical data. In this paper, we provide two contributions: we show how to use a linear factor model as a device for estimating a combination of several networks that monitor the links across variables from different viewpoints; and we demonstrate that Granger causality should be combined with quantile-based causality when the focus is on risk propagation. The empirical evidence supports the latter claim.

Suggested Citation

  • Bonaccolto, Giovanni & Caporin, Massimiliano & Panzica, Roberto Calogero, 2017. "Estimation and model-based combination of causality networks," SAFE Working Paper Series 165, Leibniz Institute for Financial Research SAFE.
    • Handle: RePEc:zbw:safewp:165
    DOI: 10.2139/ssrn.2909585
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    More about this item

    Keywords

    granger causality; quantile causality; multi-layer network; network combination;
    All these keywords.

    JEL classification:

    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics
    • C31 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Cross-Sectional Models; Spatial Models; Treatment Effect Models; Quantile Regressions; Social Interaction Models
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • G01 - Financial Economics - - General - - - Financial Crises

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