Evaluating financial contagion through Ricci curvature on multivariate reactive point processes

Financial asset prices are complexly interconnected, posing a challenge in developing effective indicators for contagion. We establish a network structure among financial entities using a multivariate reactive point process. We propose the Ricci curvature of the general point process to measure chan...

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Bibliographic Details
Published in:Finance research letters 2023-12, Vol.58, p.104248, Article 104248
Main Authors: Jiang, Haotong, Zhao, Mingen, Zhang, Zirui, Luo, Tianyuan
Format: Article
Language:English
Subjects:
Financial contagion
Graph theory
Reactive point process
Ricci curvature
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Summary:Financial asset prices are complexly interconnected, posing a challenge in developing effective indicators for contagion. We establish a network structure among financial entities using a multivariate reactive point process. We propose the Ricci curvature of the general point process to measure changes in risk connectivity. A more negative overall curvature indicates higher risk connectivity among entities, reflecting the likelihood of systemic financial risk. In predicting systemic financial, empirical analysis demonstrates that our approach outperforms risk traditional indicators: CATFIN and absorption ratio. During non-alert periods of our indicator, return rates exhibit higher concentration, higher average returns, and left skewness. •A dynamic network model for analyzing financial risk contagion is constructed.•Introduction of topological analysis methods for point processes.•The proposed indicators demonstrate superior stability and sensitivity compared to traditional indicators.•Effective contagion indicator that mitigates left-tail while capturing right-tail.
ISSN:1544-6123
1544-6131
DOI:10.1016/j.frl.2023.104248