Risk spillover networks in financial system based on information theory

Abstract

Since the financial system has illustrated an increasingly prominent characteristic of inextricable connections, information theory is gradually utilized to study the financial system. By collecting the daily data of industry index (2005-2020) and region index (2012-2020) listed in China as samples, this paper applies an innovative measure named partial mutual information on mixed embedding to generate directed networks. Based on the analysis of nonlinear relationships among sectors, this paper realizes the accurate construction of “time-varying” financial network from the perspective of risk spillover. The results are presented as follow: (1) interactions can be better understood through the nonlinear networks among distinct sectors, and sectors in the networks could be classified into different types according to their topological properties connected to risk spillover; (2) in the rising stage, information is transmitted rapidly in the network, so the risk is fast diffused and absorbed; (3) in the declining stage, the network topology is more complex and panic sentiments have long term impact leading to more connections; (4) The US market, Japan market and Hongkong market have significant affect on China’s market. The results suggest that this nonlinear measure is an effective approach to develop financial networks and explore the mechanism of risk spillover.

Research on the risk transmission mechanism of international construction projects based on complex network

“…Liao et al (2019) [37] built a relational network of the exchange rate between countries along "the Belt and Road Initiative" and studied the risk contagion structure. Li et al (2021) [38] introduced the information theory, built the risk spillover network for financial systems, and found that the nonlinear measure is an effective way to develop financial networks and explore risk spillover mechanisms.…”

A deep learning model-based approach to financial risk assessment and prediction

“…With the continuous and rapid development of globalization techniques in today's economy, the linkage of interests existing between members of various large economies is increasingly tending to strengthen. The cross-border mobility of capital is more efficient, the financial system is becoming more complex, and the risk exposure and financial vulnerability are further increasing, leading to constant financial crises [1][2][3]. For example, the rapid bursting of the international asset price bubble in Japan in the early 1990s caused Japan's domestic economic growth to fall into a long-term slump, but the global Asian financial turmoil in the mid-to late-1990s curbed the rapid and healthy development of the Asian economy as a whole, and the U.S. subprime mortgage crisis in 2007 and the international financial crisis in 2008 brought economic and financial development around the world to a halt The subprime mortgage crisis in the United States in 2007 and the international financial crisis in 2008 brought economic and financial development around the world to a halt, recession and even political crisis [4][5].…”