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An R-Based Landscape Validation of a Competing Risk Model
Published on: September 16, 2022
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Statistically validated network of portfolio overlaps and systemic risk
Stanislao Gualdi1, Giulio Cimini2,3, Kevin Primicerio1
1Laboratoire MICS, Centrale Supélec, 92290 Châtenay-Malabry, France.
Scientific Reports
|December 22, 2016
Summary
Financial institutions' overlapping portfolios increase systemic risk, especially during crises. A new method identifies significant overlaps, revealing contagion channels and predicting institutional losses or gains.
Area of Science:
- Economics
- Financial Markets
- Network Science
Background:
- Common asset holdings among financial institutions (portfolio overlap) are a key channel for financial contagion.
- This overlap can trigger fire sales, leading to significant systemic losses.
Purpose of the Study:
- To develop a method for statistically assessing portfolio overlap significance.
- To construct a validated network of financial institutions to identify contagion channels.
Main Methods:
- Statistical significance assessment of portfolio overlaps in heterogeneous portfolios.
- Network construction using historical institutional holdings data (1999-2013).
- Application to any bipartite network.
Main Results:
- The proportion of significant overlaps (validated links) grew before the 2007-2008 crisis, peaking during the crisis.
- Systemic risk from fire sales was maximal during the 2007-2008 financial crisis.
- Systemic risk recovered post-2008, accelerating in 2013.
Conclusions:
- The validated network effectively identifies potential financial contagion pathways.
- Market trends are amplified within identified portfolios, signaling future institutional gains or losses.
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