A dynamic network model with persistent links and node-specific latent variables, with an application to the interbank market

We propose a dynamic network model where two mechanisms control the probability of a link between two nodes: (i) the existence or absence of this link in the past, and (ii) node-specific latent variables (dynamic fitnesses) describing the propensity of each node to create links. Assuming a Markov dynamics for both mechanisms, we propose an Expectation-Maximization algorithm for model estimation and inference of the latent variables. The estimated parameters and fitnesses can be used to forecast the presence of a link in the future. We apply our methodology to the e-MID interbank network for which the two linkage mechanisms are associated with two different trading behaviors in the process of network formation, namely preferential trading and trading driven by node-specific characteristics. The empirical results allow to recognise preferential lending in the interbank market and indicate how a method that does not account for time-varying network topologies tends to overestimate preferential linkage.Comment: 19 pages, 6 figure

A dynamic network model of the unsecured interbank lending market

We introduce a dynamic network model of interbank lending and estimate the parameters by indirect inference using network statistics of the Dutch interbank market from February 2008 to April 2011. We find that credit-risk uncertainty and peer monitoring are significant factors in explaining the sparse core-periphery structure of the market and the presence of relationship lending. Shocks to credit-risk uncertainty lead to extended periods of low market activity, intensified by reduced peer monitoring. Moreover, changes in the central bank's interest rate corridor have both a direct effect on the market as well as an indirect effect by changing banks’ monitoring efforts

Dynamic network models with applications to finance

This thesis provides new contributions to the field of network models, in two directions. On one hand, we study statistical models of static networks, in particular by contributing to the problem of community detection when link direction is taken into account, thus identifying what are the macroscopic structures of interest for the problem and the conditions for detectability [Wilinski et al., 2019]. Then, we introduce novel statistical models of dynamic networks which are able to capture simultaneously latent dynamics for node-specific characteristics together with link-specific persistence patterns. While the latent dynamics drives the evolution of the network topologies, such as the node degree, i.e. the number of incident links to the node, or the community structure, i.e. how nodes connect each other in forming groups, link persistence preserves the past structure of the network. Within this context, the contribution of the thesis is twofold, both theoretical and empirical [Mazzarisi et al., 2019a, Barucca et al., 2018]. We develop novel methodologies to disentangle the two linkage mechanisms in order to learn correctly both latent variables and static parameters of the models. And we consider also applications to financial data to reveal genuine patterns of persistence, which reflects the role both nodes and links have in the process of network formation and evolution. On the other hand, with a focus on the systemic risk of financial systems, we present a theoretical study of the expectation feedback mechanism which governs the dynamics of a financial network, thus determining its dynamical stability [Mazzarisi et al., 2019b]. Any financial system is an expectation feedback system: the current decisions of financial agents depend on what they expect will occur in the future. Agents\u2019 decisions affect the price dynamics in illiquid markets. Then, when expectations are formed by using models of past observations, the price dynamics itself feeds back on agents\u2019 expectations. This is in effect a feedback dynamics. Interestingly, the process of expectation formation by agents and the price dynamics act on different time scales. In our modeling, it is slow for the agents\u2019 expectations and fast for the price dynamics. Moreover, the agents\u2019 decisions, given the expectations formed on the basis of the random price dynamics, is to some extent deterministic, because they represent the optimal portfolio choice in a heavily regulated market. This separation of time scales is crucial and we are able to characterize analytically the feedback dynamics in the asymptotic limit of one time scale infinitely larger than the other one. Hence, we contribute to the research field of systemic risk with the first analytical proof (to the best of our knowledge) of how expectation feedbacks in relation to the estimation of investments\u2019 risk and dependencies determine the dynamical instability of a financial system. In line with the two research directions, the thesis is divided in two parts. [...

Influence in economic and political systems: A network scientific approach

Complex social systems strive by exchanging information and resources. By means of the exchange, some actors in the system are able to at least partially determine the behaviour of another actor, thereby influencing it. Both the information exchange process and the degree of actors’ influence are latent, unobserved phenomena in many instances of real-world systems. This thesis presents a framework that intends to unearth the two hidden properties. It does so by introducing a Network Inference and Influence Framework (NIIF), which makes use of graph-based methods to derive a latent network in a social system, and measure the influence of its elements. The framework is applied on three case studies where the latency problem translates into research questions with importance for public policy making. The first case study uses NIIF to estimate the latent network of interdependency across financial institutions, and measures the extent to which a bank may negatively influence the system after an economic distress. In the second case study, a network of information diffusion is extracted from House of Commons parliamentary debates, testing the relation between the resulted metric of influence and speakers’ positions in government. The last case study builds a network of semantic and ideological affinity across UN General Assembly members, showing how graph-based methods can detect global political change. The thesis concludes with a discussion of potential future usages of the framework, as well as ameliorations

Contingent convertible bonds in financial networks

We study the role of contingent convertible bonds (CoCos) in a complex network of interconnected banks. By studying the system’s phase transitions, we reveal that the structure of the interbank network is of fundamental importance for the effectiveness of CoCos as a financial stability enhancing mechanism. Our results show that, under some network structures, the presence of CoCos can increase (and not reduce) financial fragility, because of the occurring of unneeded triggers and consequential suboptimal conversions that damage CoCos investors. We also demonstrate that, in the presence of a moderate financial shock, lightly interconnected financial networks are more robust than highly interconnected networks. This makes them a potentially optimal choice for both CoCos issuers and buyers

New approaches in statistical network data analysis

This cumulative dissertation is dedicated to the statistical analysis of network data. The general approach of combining network science with statistical methodology became very popular in recent years. An important reason for this development lies in the ability of statistical network data analysis to provide a means to model and quantify interdependencies of complex systems. A network can be comprehended as a structure consisting of nodes and edges. The nodes represent general entities that are related via the edges. Depending on the research question at hand, it is either of interest to analyze the dependence structure among the nodes or the distribution of the edges given the nodes. This thesis consists of six contributed manuscripts that are concerned with the latter. Based on statistical models, edges in different dynamic and weighted networks are investigated or reconstructed. To put the contributing articles in a general context, the thesis starts with an introductory chapter. In this introduction, central concepts and models from statistical network data analysis are explained. Besides giving an overview of the available methodology, the advantages and drawbacks of the models are given, supplemented with a discussion of potential extensions and modifications. Content-wise it is possible to divide the articles into two projects. One project is focused on the statistical analysis of international arms trade networks. Two articles are devoted to the global exchange of major conventional weapons with a focus on the dynamic structure of the system and the volume traded. A third article explores latent patterns in the international trade system of small arms and ammunition. Additionally, the arms trade data is used in a survey paper that is concerned with dynamic network models. The second project regards the reconstruction of financial networks from their marginals and includes two articles. All contributing articles are attached in the form as published as a preprint. For publications in scientific journals, the respective sources are given. Additionally, the contributions of all authors are included. All computations were done with the statistical software R and the corresponding code is available from Github.Diese kumulative Dissertation beschäftigt sich mit der statistischen Analyse von Netzwerkdaten. Der generelle Ansatz, interdependente Systeme als Netzwerke zu konzeptualisieren um sie anschließend mit statistischer Methodik zu analysieren, hat in den vergangenen Jahren deutlich an Relevanz gewonnen. Insbesondere die Flexibilität der Methodik, zusammen mit der Möglichkeit komplexe Abhängigkeitsstrukturen zu modellieren, hat zu ihrer Popularität beigetragen. Ein Netzwerk ist ein System, das sich aus Knoten und Kanten zusammensetzt. Dabei sind die Knoten generelle Einheiten, die durch die Kanten miteinander in Verbindung gebracht werden. Je nach Forschungsfrage interessieren entweder die Abhängigkeiten zwischen den Knoten oder die Verteilung der Kanten mit gegebenen Knoten. Diese Arbeit greift mit insgesamt sechs Artikeln den zweiten Ansatz auf. Unter Zuhilfenahme von statistischen Modellen werden die Kanten in verschiedenen binären und gewichteten Netzwerken analysiert, beziehungsweise rekonstruiert. Um der Arbeit einen generellen Kontext zu geben, wird den angehängten Artikeln ein Mantelteil vorangestellt. In diesem wird auf zentrale Konzepte und Modelle der statistischen Netzwerkanalyse eingegangen. Dabei werden die Vorteile als auch die Nachteile der Modelle diskutiert und potenzielle Erweiterungen und Modifikationen beschrieben. Die in dieser Dissertation enthaltenen Artikel lassen sich grob in zwei verschiedene Projekte einordnen. In einem Projekt steht die statistische Modellierung des internationalen Waffenhandels im Fokus. Zwei Artikel untersuchen den globalen Austausch von Großwaffen (Major Conventional Weapons), dabei wird sowohl die dynamische Struktur als auch das gehandelte Waffenvolumen analysiert. Ein weiterer Artikel widmet sich den latenten Strukturen im internationalen Kleinwaffenhandel (Small Arms and Ammunition). Weiterhin werden die Waffenhandelsdaten in einem Übersichtsartikel, der sich mit dynamischen Netzwerkmodellen beschäftigt, verwendet. Das zweite Projekt befasst sich, verteilt über zwei Artikel, mit der Rekonstruktion von finanziellen Netzwerken basierend auf den Randsummen von Netzwerkmatrizen. Alle in dieser Dissertation angehängten Artikel befinden sich in der Form, in der sie als Vorabversion veröffentlicht wurden. Bei Veröffentlichungen in Fachjournalen wird die jeweilige Quelle angegeben. Zudem wird vor jedem Artikel der Beitrag des jeweiligen Autors angegeben. Sämtliche Analysen wurden mit der statistischen Software R durchgeführt. Der dazugehörige Code ist über Github verfügbar

Reexaminando las relaciones de préstamo interbancario: ¿Están los fondos disponibles a un precio similar?

Según la hipótesis de disciplina de mercado, el monitoreo que realizan los bancos que otorgan créditos en el mercado interbancario puede inducir cambios en el precio o disponibilidad de nuevos fondos para los bancos que buscan liquidez. No obstante, la presencia de relaciones de préstamo interbancario se ha evaluado con base en la disponibilidad de fondos únicamente—dejando de lado su precio. En este documento reexaminamos la presencia de relaciones de préstamo interbancario evaluando simultáneamente la disponibilidad y precio de fondos interbancarios. Calculamos el coeficiente de sobrevivencia de las redes diarias que contienen el precio de los préstamos interbancarios en Colombia desde 2014 hasta 2020. Bajo esta aproximación, una relación interbancaria sobrevive de un día al siguiente si los fondos están disponibles a un precio que no se incrementa demasiado; en este sentido, la no disponibilidad de fondos o un aumento considerable en el precio de los fondos marca una discontinuidad en la relación entre dos bancos. Encontramos que cerca del 38 porciento de las relaciones en el mercado interbancario no colateralizado sobrevive de un día al siguiente. En consecuencia, desde una perspectiva amplia de disciplina de mercado, encontramos evidencia de la existencia de relaciones de préstamo interbancario en Colombia.Under the market discipline hypothesis, monitoring by interbank lenders may induce changes in either the price or availability of new interbank funds to borrower banks. However, the presence of interbank relationship lending has been evaluated based on the availability of funds only— disregarding their price. We revisit relationship lending in unsecured interbank lending markets by simultaneously evaluating the availability and price of funds. We calculate the survival ratio of networks containing the price of daily interbank lending in Colombia from 2014 to 2020. Under this framework, an interbank relation survives from one day to the next if the funds are available at a price that does not increase too much; that is, either a halt in interbank funding or a sizeable increase in the price of interbank funding mark a break in the relation between two banks. We find that about 38 percent of relations in the Colombian unsecured interbank lending market survive from one day to the next. Therefore, from a comprehensive market discipline perspective, we find evidence of interbank relationship lending in Colombia.Enfoque Las relaciones de préstamo sin colateral entre entidades financieras son fundamentales para el buen funcionamiento de la economía. La estabilidad de estas relaciones refleja la confianza que existe al interior del sistema financiero y son, por lo tanto, vitales para la estabilidad financiera. Se hace referencia a relaciones de préstamo interbancario (interbank relationship lending) cuando esas relaciones son estables y fuertes a través del tiempo. No existe un método único para medir la estabilidad y fortaleza de las relaciones de préstamo sin colateral entre entidades financieras. Sin embargo, los métodos existentes en la literatura se concentran en determinar si existen fondos disponibles del prestamista al prestatario. El costo de los fondos disponibles es irrelevante. No considerar el costo de los fondos disponibles puede ser inconveniente. Por ejemplo, si el Banco A le presta al Banco B en dos periodos consecutivos, esta relación es usualmente considerada como estable. Pero, si ese préstamo del Banco A al Banco B en el primer periodo tiene un costo de 3 por ciento y en el segundo periodo tiene un costo del 6 por ciento, ¿es esta relación estable? El costo de los fondos disponibles contiene información sobre la confianza entre las instituciones financieras. No considerar el costo de los fondos ignora un concepto bien conocido en la literatura, la disciplina de mercado, según el cual el monitoreo entre instituciones financieras puede resultar en cambios en la disponibilidad y en el costo de los fondos que se prestan entre ellas. Contribución Desarrollamos una metodología que permite calcular la proporción de préstamos interbancarios que sobrevive ininterrumpidamente a un precio similar a través del tiempo. Para esto se construyó una serie de redes que contienen información sobre el costo de los préstamos interbancarios no colateralizados entre instituciones financieras en Colombia desde 2014 hasta 2020, sobre la cual se calculó la razón de sobrevivencia (i.e. la proporción de relaciones que sobrevive durante un periodo). Esta metodología permite cuantificar la persistencia de las relaciones de préstamo interbancario de manera práctica y permanente (con frecuencia diaria) bajo la premisa según la cual la disponibilidad de fondos a un precio similar determina la existencia de relaciones estables y fuertes. Esta metodología no solo permite evaluar si existen relaciones de préstamo interbancario, sino que brinda una herramienta adicional para monitorear y estudiar de mejor manera la confianza del mercado interbancario, la cual es de importancia crítica para la estabilidad financiera. Resultados Con base en información diaria desde enero de 2014 hasta agosto de 2020, se encontró que cerca del 38 por ciento de las relaciones de préstamo persisten de un día para otro a un precio similar. Así mismo, se comprobó que la aleatoriedad no es una posible explicación de los resultados obtenidos. En consecuencia, desde una perspectiva de disciplina de mercado, se concluye que existe evidencia de relaciones de préstamo interbancario en el caso colombiano. Adicionalmente, los resultados sugieren que la metodología presentada en el artículo brinda una herramienta adicional en el monitoreo de los mercados financieros, así como un elemento adicional para el estudio y análisis de dichos mercados. FRASE DESTACADA Esta metodología permite cuantificar la persistencia de las relaciones de préstamo interbancario de manera práctica y permanente (con frecuencia diaria) bajo la premisa según la cual la disponibilidad de fondos a un precio similar determina la existencia de relaciones estables y fuertes