The impact of financial contagion on real economy-An empirical research based on combination of complex network technology and spatial econometrics model.

Abstract

This study presents financial network indicators that can be applied to inspect the financial contagion on real economy, as well as the spatial spillover and industry aggregation effects. We propose to design both a directed and undirected networks of financial sectors of top 20 countries in GDP based on symbolized transfer entropy and Pearson correlation coefficients. We examine the effect and usefulness of the network indicators by newly using them instead of the original Dow Jones financial sector as explanatory variables to construct the higher-order information spatial econometric models. The results demonstrate that the estimated accuracies obtained from both the two networks are improved significantly compared with the spatial econometric model using the original data. It indicates that the network indictors are more effective to capture the dynamic information of financial systems. And meanwhile, the accuracy based on the directed network is a little higher than the undirected network, which indicates the symbolized transfer entropy, i.e. the directed and weighted network, is more suitable and effective to reflect relationships in the financial field. In addition, the results also show that under the global financial crisis, the co-movement between financial sectors of a country/region and the global financial sector as well as between financial sectors and real economy sectors is increased. However, some sectors in particular Utilities and Healthcare are impacted slightly. This study tries to use the financial network indicators in modeling to study contagion channels on the real economy and the industry aggregation effects and suggest how network indicators can be practically used in financial fields.