Fannie Mae and Freddie Mac, Bear Stearns, Lehman Brothers: As the major dominoes of the financial sector continue to fall at an alarming rate and the Federal Reserve attempts to forestall a systemic meltdown of the domestic financial network, University of Arkansas economists find that a network approach to the study of financial “contagion” – the transmission and impact of financial crises – may be applied to understand the current turmoil in the U.S. banking sector and the need for a systemwide response by the Fed.
A new study by Raja Kali and Javier Reyes, economics professors in the Sam M. Walton College of Business at the University of Arkansas, reveals that integration in the global financial network is a double-edged sword. On one hand, being well connected to the network can make a country more vulnerable to systemic shocks. However, this same connectedness also is associated with an increased ability to dissipate economic shocks to the system. Kali and Reyes reached these conclusions by studying how international financial crises travel though the network of global trading relationships.
Over the past decade, economists focusing on globalization and international trade have debated why financial crises – the Mexican Tequila crisis of 1994 and the Asian flu crisis of 1997, for example – spread financial contagion, while other crises had less impact. Drawing on recent advances in the study of networks, Kali and Reyes developed a new method to better explain various countries’ stock market performance in the wake of financial crises.
The researchers constructed novel network-based measures of connectedness – that is, the extent to which a country is integrated into the global trading system – and found that crises in “epicenter” countries – countries in which crises originated – were amplified if the country was better integrated into the trade network. On the other hand, “target” countries affected by these financial shocks were better able to cushion the impact of the crises if they too were well integrated into the global trading network.
Previous attempts to explain the transmission of global financial crises focused on bilateral trade relationships. Having applied the study of networks in other research projects, Kali and Reyes thought that a systemwide perspective might better explain financial contagion and the impact of crises.
Starting with the simple question, “Does integration into the international trade network make a country more vulnerable to financial crises?” Kali and Reyes used international trade data to map a global trading system as an interdependent complex network that ties countries around the world together as a whole. The trade-flow data allowed the researchers to construct a complete global network of linkages connecting 182 countries.
“Underlying this approach is the assumption that the structure of the international trade network functions as meaningful economic linkages between countries,” Reyes said. “In this spirit, we assumed the network of international trade linkages to be the backbone that underpins and motivates trade and financial flows of various kinds between countries.”
The pattern of international trade linkages allowed the researchers to obtain important indicators of country-level integration or connectedness. In their analysis, Kali and Reyes developed several distinct measures of this connectedness to the global trading system.
One measure, called “node importance,” is an index of network dependency in which some countries are defined as more important if other countries, which are also important within the network, depend on them. A country that was more important according to this measure was likely to have a greater influence on the network if it was affected by an adverse shock. A second indicator is “node centrality,” which demonstrates how central a given country is by measuring how similar it is to a perfect node, which would be a country linked to every other country.
Kali and Reyes applied these indicators to analyze five non-overlapping global financial crises – the so-called Mexican Tequila crisis, the Asian flu crisis, the Russian virus and crises in Argentina and Venezuela. They found that the network effect of the crisis epicenter country was substantially higher for the Tequila, Asian flu and Russian virus crises than for the Venezuelan and Argentine crises. In other words, Venezuela and Argentina were revealed as poorly connected target countries.
“Better connected target countries like the United States, Canada and Italy can dampen the negative effects of shocks originating in other countries,” Kali said, “while less connected countries like Ecuador, India and Venezuela cannot.”
The researchers’ study, titled “Financial Contagion on the International Trade Network,” will be published soon in Economic Inquiry.Raja Kali, associate professor of economics
Matt McGowan | Newswise Science News
Mathematical confirmation: Rewiring financial networks reduces systemic risk
22.06.2017 | International Institute for Applied Systems Analysis (IIASA)
Frugal Innovations: when less is more
19.04.2017 | Fraunhofer-Institut für Arbeitswirtschaft und Organisation IAO
An international team of scientists has proposed a new multi-disciplinary approach in which an array of new technologies will allow us to map biodiversity and the risks that wildlife is facing at the scale of whole landscapes. The findings are published in Nature Ecology and Evolution. This international research is led by the Kunming Institute of Zoology from China, University of East Anglia, University of Leicester and the Leibniz Institute for Zoo and Wildlife Research.
Using a combination of satellite and ground data, the team proposes that it is now possible to map biodiversity with an accuracy that has not been previously...
Heatwaves in the Arctic, longer periods of vegetation in Europe, severe floods in West Africa – starting in 2021, scientists want to explore the emissions of the greenhouse gas methane with the German-French satellite MERLIN. This is made possible by a new robust laser system of the Fraunhofer Institute for Laser Technology ILT in Aachen, which achieves unprecedented measurement accuracy.
Methane is primarily the result of the decomposition of organic matter. The gas has a 25 times greater warming potential than carbon dioxide, but is not as...
Hydrogen is regarded as the energy source of the future: It is produced with solar power and can be used to generate heat and electricity in fuel cells. Empa researchers have now succeeded in decoding the movement of hydrogen ions in crystals – a key step towards more efficient energy conversion in the hydrogen industry of tomorrow.
As charge carriers, electrons and ions play the leading role in electrochemical energy storage devices and converters such as batteries and fuel cells. Proton...
Scientists from the Excellence Cluster Universe at the Ludwig-Maximilians-Universität Munich have establised "Cosmowebportal", a unique data centre for cosmological simulations located at the Leibniz Supercomputing Centre (LRZ) of the Bavarian Academy of Sciences. The complete results of a series of large hydrodynamical cosmological simulations are available, with data volumes typically exceeding several hundred terabytes. Scientists worldwide can interactively explore these complex simulations via a web interface and directly access the results.
With current telescopes, scientists can observe our Universe’s galaxies and galaxy clusters and their distribution along an invisible cosmic web. From the...
Temperature measurements possible even on the smallest scale / Molecular ruby for use in material sciences, biology, and medicine
Chemists at Johannes Gutenberg University Mainz (JGU) in cooperation with researchers of the German Federal Institute for Materials Research and Testing (BAM)...
19.06.2017 | Event News
13.06.2017 | Event News
13.06.2017 | Event News
23.06.2017 | Physics and Astronomy
23.06.2017 | Physics and Astronomy
23.06.2017 | Information Technology