Journal of Network Theory in Finance

Network centrality, failure prediction and systemic risk

Abalfazl Zareei

  • Peripheral firms in the financial network are more prone to CDS jump events.
  • Low central firms are more likely to fail.
  • Centrality as a measure of systemic importance contains predictive power in out-of-sample analysis.


A financial market can be expressed as a network structure in which the stocks reside as nodes and the links account for returns correlation. The centrality measure in the financial network structure captures firms' embeddedness and connectivity in the capital market structure. This paper investigates firms' centrality in the financial network as an explanatory variable in corporate-failure prediction as well as a measure of firms' systemic importance. First, when analyzing credit default swap (CDS) spreads, we find that peripheral firms in the network have higher average CDS spreads and a higher propensity for CDS jump events. Second, centrality is found to increase the explanatory power of default prediction models, and, moreover, it is negatively related to failure and bankruptcy probability. This implies that peripheral firms in the network are more likely to fail. Finally, by examining the out-of-sample performance of centrality as a measure of systemic importance, we find that centrality correctly distinguishes the firms that suffered higher losses during the 2007-8 crisis period.

Sorry, our subscription options are not loading right now

Please try again later. Get in touch with our customer services team if this issue persists.

New to View our subscription options

You need to sign in to use this feature. If you don’t have a account, please register for a trial.

Sign in
You are currently on corporate access.

To use this feature you will need an individual account. If you have one already please sign in.

Sign in.

Alternatively you can request an individual account here