A0749
Title: Mapping risk contagion through graphical models and early warning signals in Taiwan's stock market
Authors: Nok Hang Chan - National Yang Ming Chiao Tung University (Hong Kong) [presenting]
Huei-Wen Teng - National Yang Ming Chiao Tung University (Taiwan)
Kuang-Yao Lee - Temple University (United States)
Abstract: Graphical models are leveraged to investigate systemic risk in Taiwan's financial markets, focusing on the dynamic interactions among the 30 largest market-capitalization firms from January 1986 to July 2024. Two approaches are compared: The Granger causality network, which captures directional predictability among firms' returns, and the functional, structural equation model (fsem), a technique recently adapted from neuroscience to estimate causal relations in high-dimensional functional data. The analysis highlights significant shifts in network centrality over time, with financial and telecommunications sectors emerging as key influencers, contrary to the commonly held belief in the dominance of technology firms. By measuring network connectivity through degree centrality, closeness, and eigenvector centrality, an early warning mechanism is proposed for identifying periods of heightened systemic risk. The results offer practical implications for institutional risk management and individual investment strategies, demonstrating the value of network-based models in financial risk monitoring.
