Network topology and systemic risk: Evidence from the Euro Stoxx market

Abstract

This study investigates the network topology of equity volatilities. We propose a novel approach to model the interdependencies of the Euro Stoxx companies by constructing the minimum spanning tree with the upper tail dependence coefficient of the equity volatility. The empirical results demonstrate the usefulness of the network topology for the detection of systemic risk in high-volatility environments. More specifically, during crisis periods, the topology of the minimum spanning tree becomes more star-like and compact, accompanied by stronger rich-club effects. Such a network configuration is known to be less resilient to shock and more prone to systemic risk.