A0507
Title: Estimation and model-based combination of causality networks
Authors: Roberto Panzica - Goethe University House of finance (Italy) [presenting]
Massimiliano Caporin - University of Padova (Italy)
Giovanni Bonaccolto - University of Padova (Italy)
Abstract: Causality is a widely used concept in theoretical and empirical economics. The recent financial economics literature has used Granger causality to detect the presence of contemporaneous links between financial institutions and, in turn, to obtain a network structure. Subsequent studies combined the estimated networks with traditional pricing or risk measurement models to improve their fit to empirical data. We provide two contributions: we show how to use a linear factor model as a device for estimating a combination of several networks that monitor the links across variables from different viewpoints; and we demonstrate that Granger causality should be combined with quantile-based causality when the focus is on risk propagation. The empirical evidence supports the latter claim.
