Journal Of Network Theory In Finance

Risk.net

The econometrics of Bayesian graphical models: a review with financial application

Daniel Felix Ahelegbey

  • Higher vulnerability of the US system during the financial crisis.
  • Banks and Insurers are more central in contagion spread.
  • Bayesian graphs capture complex interactions than Granger Causality. 

ABSTRACT

Recent advances in empirical finance have shown that the adoption of network theory is critical in order to understand contagion and systemic vulnerabilities. While interdependencies among financial markets have been widely examined, only a few studies review networks, and they do not focus on the econometrics aspects. This paper presents a state-of-the-art review on the interface between statistics and econometrics in the inference and application of Bayesian graphical models. We specifically highlight the connections and possible applications of network models in financial econometrics in the context of systemic risk.

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