Financial Bridges and Network Communities

Abstract

Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte.Financial crises and systemic risks proved to play central roles as shock transmitters to the real economy, threatening the stability of the economic and financial systems. These phenomena have boosted a massive interest in the literature which deeply investigated systemic risk and contagion channels on the financial systems.Generally, systemic risk may arise as the interactions among financial institutions and markets which, consequently, lead to financial crises. A stylized fact that occurs often in real networks is the presence of a group of nodes which share common properties or play a similar role within the network. These community structures have been recognized also in finance with the presence of key nodes (community bridges) linked through short-cuts to otherwise separated communities. The case in point to better understand the role of the community structure in a network is provided by epidemiology. A parallelism with the financial stability indicates that the mitigation and prevention of the spread in infectious diseases (financial contagion) can be attained by seeking actively to immunize the super-spreaders. However, the presence of a community structure significantly affects the dynamic of the disease: immunization interventions focusing on nodes strongly linked with other communities (community bridges) are in this case more effective than the ones which aim to the highly connected nodes in the whole network. The reason is that community bridges are more relevant in spreading out contagion with respect to the nodes with fewer inter-community connections in the group: with the latter, contagion may stop before spreading out to the other communities. Hence, in a network with a community structure, classical connectedness measures can lead to the misidentification of a given SIFI at least in two cases: i) a financial institution shows a lower total degree with respect to the other nodes in the community, but a higher degree to the nodes belonging to other communities (false negative); ii) a financial institution shows a higher total degree with respect to the other nodes in the community, but a lower degree to the nodes belonging to other communities (false positive). Therefore, also in a financial network, the node immunization through the identification of highly connected nodes may not be effective in a network with community structure.On this ground, the aim of this paper is to investigate the topology of the financial networks focusing on ...