Abstract
This work uses the stocks of the 197 largest companies in the world, in terms of market capitalization, in the financial area, from 2003 to 2012. We study the causal relationships between them using Transfer Entropy, which is calculated using the stocks of those companies and their counterparts lagged by one day. With this, we can assess which companies influence others according to sub-areas of the financial sector, which are banks, diversified financial services, savings and loans, insurance, private equity funds, real estate investment companies, and real estate trust funds. We also analyze the exchange of information between those stocks as seen by Transfer Entropy and the network formed by them based on this measure, verifying that they cluster mainly according to countries of origin, and then by industry and sub-industry. Then we use data on the stocks of companies in the financial sector of some countries that are suffering the most with the current credit crisis, namely Greece, Cyprus, Ireland, Spain, Portugal, and Italy, and assess, also using Transfer Entropy, which companies from the largest 197 are most affected by the stocks of these countries in crisis. The aim is to map a network of influences that may be used in the study of possible contagions originating in those countries in financial crisis.
Highlights
In his speech delivered at the Financial Student Association in Amsterdam [1], in 2009, Andrew G
It was the belief of theoreticians and practitioners of the financial market that connectivity between financial companies meant risk diversification and dispersion, but further studies showed that networks of certain complexity exhibit a robust but fragile structure, where crises may be dampened by sharing a shock among many institutions, but where they may spread faster and further due to the connections between companies
The work that is considered the first that deals with the subject is the one of Allen and Gale [2], where the authors modeled financial contagion as an equilibrium phenomenon, and concluded that equilibrium is fragile, that liquidity shocks may spread through the network, and that cascade events depend on the completeness of the structure of interregional claims between banks
Summary
In his speech delivered at the Financial Student Association in Amsterdam [1], in 2009, Andrew G. Executive Director of Financial Stability of the Bank of England, called for a Entropy 2014, 16 rethinking of the financial network, that is the network formed by the connections between banks and other financial institutions He warned that, in the last decades, this network had become more complex and less diverse, and that these facts may have led to the crisis of 2008. This article contributes to the first direction pointed by Haldane, that of understanding the international financial network We do it by calculating a network based on the daily returns of the stocks of the 197 largest financial companies across the world in terms of market capitalization that survive a liquidity filter. We enlarge the original network obtained by Transfer Entropy to include the most liquid stocks belonging to financial companies in some European countries that have been receiving much attention recently due to the fact that they are facing different degrees of economic crises, and determine who are the major financial companies in the world that are most affected by price movements of those stocks, and which of those stocks belonging to countries in crisis are the most influent ones
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