nep-net New Economics Papers
on Network Economics
Issue of 2020‒12‒21
eighteen papers chosen by
Alfonso Rosa García
Universidad de Murcia

  1. Optimism leads to optimality: Ambiguity in network formation * By Péter Bayer; Ani Guerdjikova
  2. Default count-based network models for credit contagion By Arianna Agosto; Daniel Felix Ahelegbey
  3. Drivers of organic farming: Lab-in-the-field evidence of the role of social comparison and information nudge in networks in Vietnam. By Kene Boun My; Phu Nguyen-Van; Thi Kim Cuong Pham; Anne Stenger; Tuyen Tiet; Nguyen To-The
  4. NetVIX - A Network Volatility Index of Financial Markets By Daniel Felix Ahelegbey; Paolo Giudici
  5. Strategic Interactions in Financial Networks By Chukwudi Henry Dike
  6. Insurance and Propagation in Village Networks By Cynthia Kinnan; Krislert Samphantharak; Robert Townsend; Diego A. Vera Cossio
  7. Information network modeling for U.S. banking systemic risk By Nicola, Giancarlo; Cerchiello, Paola; Aste, Tomaso
  8. Non-Identifiability in Network Autoregressions By Federico Martellosio
  9. Statistical Modelling of Downside Risk Spillovers By Daniel Felix Ahelegbey;
  10. Contagion accounting By Aldasoro, Iñaki; Hüser, Anne-Caroline; Kok, Christoffer
  11. Mapping the Commonwealth Countries’ Participation in Global Value Chains By Escaith, Hubert; Khorana, Sangeeta
  12. Binary Outcomes and Linear Interactions By Vincent Boucher; Yann Bramoullé
  13. Assessing Systemic Risk in the Insurance Sector via Network Theory By Gian Paolo Clemente; Alessandra Cornaro
  14. Global Value Chains, Trade Shocks and Jobs: An Application to Brexit By Hylke Vandenbussche; William Connell Garcia; Wouter Simons
  15. Parents, Neighbors and Youth Crime By Díaz, Carlos; Patacchini, Eleonora
  16. Hops, Skip & a Jump - The Regional Uniqueness of Beer Styles By Ryan M. Hynes; Bernardo S. Buarque; Ronald B. Davies; Dieter F. Kogler
  17. The Cost of Dissolving the WTO: The Role of Global Value Chains By Ahmad Lashkaripour; Mostafa Beshkar
  18. Interconnected Deviations from Covered Interest Parity By Daniel Felix Ahelegbey; Oyakhilome Wallace Ibhagui

  1. By: Péter Bayer (TSE - Toulouse School of Economics - UT1 - Université Toulouse 1 Capitole - EHESS - École des hautes études en sciences sociales - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement); Ani Guerdjikova (GAEL - Laboratoire d'Economie Appliquée de Grenoble - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement - Grenoble INP - Institut polytechnique de Grenoble - Grenoble Institute of Technology - UGA [2020-....] - Université Grenoble Alpes [2020-....] - CNRS - Centre National de la Recherche Scientifique - UGA [2020-....] - Université Grenoble Alpes [2020-....])
    Abstract: We analyze a model of endogenous two-sided network formation where players are affected by uncertainty in their opponents' decisions. We model this uncertainty using the notion of equilibrium under ambiguity (Eichberger and Kelsey, 2014). Unlike the set of Nash equilibria, the set of equilibria under ambiguity does not always include underconnected and thus inefficient networks such as the empty network. On the other hand, it may include networks with unreciprocated, one-way links, which comes with an efficiency loss as linking efforts are costly. We characterize equilibria under ambiguity and provide conditions under which increased player optimism comes with an increase in efficiency in equilibrium. Next, we analyze the dynamic situation with one-sided, myopic updating with regular optimistic shocks and derive a global stability condition of benefit-maximizing equilibrium networks.
    Keywords: network formation,ambiguity,equilibrium selection,Pareto-optimality,optimism,pessimism
    Date: 2020–11–13
  2. By: Arianna Agosto (Università di Pavia); Daniel Felix Ahelegbey (Università di Pavia)
    Abstract: Interconnectedness between economic institution and sectors, already recognised as a trigger of the great financial crisis in 2008-2009, is assuming growing importance in financial systems. In this paper we study contagion effects between corporate sectors using financial network models, in which the significant links are identified through conditional independence testing. While the existing financial network literature is mostly focused on Gaussian processes, our approach is based on discrete data. We indeed test dependence in the conditional mean (and volatility) of default counts in different economic sector estimated from Poisson autoregressive models, and in its shocks. Our empirical application to Italian corporate defaults in the 1996-2018 period reveals evidence of a high inter-sector vulnerability, especially at the onset of the global financial crisis in 2008 and in the following years. Many contagion effects between corporate sectors are indeed found in the shock component of the default count dynamics.
    Keywords: Financial networks; Inter-sector contagion; Poisson autoregressive models; Vector autoregressive models; Conditional Granger causality; PC-algorithm
    JEL: C01 C32 C58 G21 G32
    Date: 2020–02
  3. By: Kene Boun My; Phu Nguyen-Van; Thi Kim Cuong Pham; Anne Stenger; Tuyen Tiet; Nguyen To-The
    Abstract: This study examines farmers’ investments in organic farming using the data from a contextualized lab-in-the-field experiment in Northern Vietnam. We analyze how network structures, information nudge and social comparison between farmers impact their decisions. Results show that networks play a key role in encouraging the adoption of organic farming. However, this effect differs depending on the type of network (circle, star or complete), indicating that the role of individuals and the number of individual connections matter. We find that the cooperation incentivized by social comparison can be more easily achieved in decentralized networks like circle networks than in star networks or complete networks. Our results suggest that policymakers can rely on social interaction and social comparison between farmers as well as on information nudge to encourage farmers to make decisions that support sustainable agriculture in Vietnam.
    Keywords: Lab-in-the-field; Network; Nudge; Organic agriculture; Social comparison..
    JEL: C91 C93 O13 Q12
    Date: 2020
  4. By: Daniel Felix Ahelegbey (University of Pavia); Paolo Giudici (University of Pavia)
    Abstract: We construct a network volatility index (NetVIX) via market interconnectedness and volatilities to measure global market turbulence. The NetVIX multiplicatively decomposes into an average volatility and a network amplifier index. It also additively decomposes into marginal volatility indices for measuring individual contribution to global turmoil. We apply our measure to study the relationship between the interconnectedness among 20 major stock markets and global market risks over the last two decades. The NetVIX is shown to be a novel approach to measuring global market risk, and an alternative to the VIX. The result shows that during crisis periods, particularly the tech-bubble, sub-prime, and COVID-19 pandemic, the interconnectedness of the markets amplifies average market risk more than 700 percent to cause a global meltdown. We find evidence that the highest risk-contributing markets to global meltdown are the US, Brazil, Hong Kong, France, and Germany.
    Keywords: Centrality, COVID-19, Financial Crises, NetVIX, Turbulence, VAR, VIX
    JEL: C11 C15 C51 C52 C55 C58 G01 G12
    Date: 2020–09
  5. By: Chukwudi Henry Dike
    Abstract: This paper models interactions of firms in a pre-trading(fixed network of lending/borrowing) period whereby firms set fixed lending rates given loan management cost. We show strategic substitution in the rate each firm sets and more fundamentally, propose that the rates charged to debtors by a creditor firm is likened to results from a private provision of public good in networks game. We then highlight specific core-periphery network properties in relation to interdependence and Nash rate charged by firms. For welfare policies, we find neutrality of intervention policies that create or reduce transaction cost and improvement based on policies that provide administrative subsidies thus creating an avenue for cost effective resource transfer policy. Lastly, we find significant relationship between a firms centrality measured by weaker negative externality and welfare improvement due to such subsidy.
    JEL: C72 D44 D85 E43 H23
    Date: 2020–12–09
  6. By: Cynthia Kinnan; Krislert Samphantharak; Robert Townsend; Diego A. Vera Cossio
    Abstract: In village economies, insurance networks are key to smoothing shocks, while production networks can propagate them. The interplay of these networks is crucial. We show that a significant health expenditure shock to one household propagates to other linked households via supply-chain and labor networks. Imperfectly insured households adjust production decisions---cutting input spending and reducing labor hiring---affecting households with whom they trade inputs and labor. Household businesses proximate to shocked households in the supply chain network experience reduced local sales, and those proximate in the labor network experience a lower probability of working locally. As a result, indirectly shocked households’ earnings and consumption fall. These declines persist over several years because networks are rigid: households appear unable to form new linkages when existing links experience negative shocks. Propagation is a function of access to insurance networks: well-insured households do not cut spending when hit by shocks, leading to minimal propagation. A simple back-of-the-envelope exercise suggests that the total magnitude of indirect effects may be larger than the direct effects and that social (village-level) gains from expanding safety nets such as health insurance may be substantially higher than private (household-level) gains.
    JEL: D13 D22 I15 O1 Q12
    Date: 2020–11
  7. By: Nicola, Giancarlo; Cerchiello, Paola; Aste, Tomaso
    Abstract: In this work we investigate whether information theory measures like mutual information and transfer entropy, extracted from a bank network, Granger cause financial stress indexes like LIBOR-OIS (London Interbank Offered Rate-Overnight Index Swap) spread, STLFSI (St. Louis Fed Financial Stress Index) and USD/CHF (USA Dollar/Swiss Franc) exchange rate. The information theory measures are extracted from a Gaussian Graphical Model constructed from daily stock time series of the top 74 listed US banks. The graphical model is calculated with a recently developed algorithm (LoGo) which provides very fast inference model that allows us to update the graphical model each market day. We therefore can generate daily time series of mutual information and transfer entropy for each bank of the network. The Granger causality between the bank related measures and the financial stress indexes is investigated with both standard Granger-causality and Partial Granger-causality conditioned on control measures representative of the general economy conditions.
    Keywords: financial stress; granger causality; graphical models
    JEL: F3 G3
    Date: 2020–11–23
  8. By: Federico Martellosio
    Abstract: We study identification in autoregressions defined on a general network. Most identification conditions that are available for these models either rely on repeated observations, are only sufficient, or require strong distributional assumptions. We derive conditions that apply even if only one observation of a network is available, are necessary and sufficient for identification, and require weak distributional assumptions. We find that the models are generically identified even without repeated observations, and analyze the combinations of the interaction matrix and the regressor matrix for which identification fails. This is done both in the original model and after certain transformations in the sample space, the latter case being important for some fixed effects specifications.
    Date: 2020–11
  9. By: Daniel Felix Ahelegbey (University of Pavia);
    Abstract: We extend the extreme downside hedge methodology to model sensitivity interconnectedness of market returns to the tail risk of other markets under turbulent conditions. We derive the interconnectedness via Bayesian graph structural learning. The empirical application examines the dynamic interconnectedness among 15 major markets, including G10 economies, during turbulent times. We investigate whether downside risk connections among these major markets are merely anecdotal or provide evidence of contagion and the most central market for spillover propagation. The result shows that the Covid-19 induced downside risk connections record the highest density, suggesting stronger evidence of contagion in the coronavirus pandemic than during the financial and eurozone crisis. Central to the spillover propagation is the finding that most of the transmitters and recipients of downside risk are EU markets.
    Keywords: Bayesian Inference, Centrality, Contagion, Conditional VaR, Downside Risk, Extreme downside hedge, Financial Crises, Financial Networks.
    JEL: C31 C58 G01 G12
    Date: 2020–10
  10. By: Aldasoro, Iñaki; Hüser, Anne-Caroline; Kok, Christoffer
    Abstract: We provide a simple and tractable accounting-based stress-testing framework to assess loss dynamics in the banking sector, in a context of leverage targeting. Contagion can occur through direct interbank exposures, and indirect exposures due to overlapping portfolios with the associated price dynamics via fire sales. We apply the framework to three granular proprietary ECB datasets, including an interbank network of 26 large euro area banks as well as their overlapping portfolios of loans, derivatives and securities. A 5 percent shock to the price of assets held in the trading book leads to an initial loss of 30 percent of system equity and an additional loss of 1.3 percent due to fire sales spillovers. Direct interbank contagion is negligible in our analysis. Our findings underscore the importance of accurately estimating the price effects of fire sales. JEL Classification: C63, G01, G18, G21
    Keywords: contagion, fire sales, interbank networks, overlapping portfolios, stress-testing
    Date: 2020–12
  11. By: Escaith, Hubert; Khorana, Sangeeta
    Abstract: This background paper provides a general picture of the characteristics and dynamics of Global Value Chains (GVC) in the Commonwealth countries. The main building blocks of the empirical analysis are based on a measure of inter-industrial linkages between and across between 43 of the 53 Commonwealth countries and sectors for which data were available. Using a trade network perspective, it measures the international flows of value-added and assesses countries’ position within GVCs. After calculating a series of in-depth GVC indica-tors, the paper assesses the potential for trade creation within the Commonwealth communi-ty. This review is complemented by several suggestions of policy and enabling measures aimed at facilitating the participation of those countries that are at the lower end of the val-ue chain.
    Keywords: Trade; Commonwealth; input-output; global value chains; inter-industry linkages; trade complementarity; regional trade agreements
    JEL: C67 F13 F15 F60 O19 O24
    Date: 2020–01
  12. By: Vincent Boucher (CRREP - Centre de recherche sur les risques, les enjeux économiques, et les politiques publiques - ULaval - Université Laval [Québec], CREATE, Centre de Recherche en économie de l'Environnement, de l'Agroalimentaire, des Transports et de l'Énergie - ULaval - Université Laval [Québec]); Yann Bramoullé (AMSE - Aix-Marseille Sciences Economiques - EHESS - École des hautes études en sciences sociales - ECM - École Centrale de Marseille - CNRS - Centre National de la Recherche Scientifique - AMU - Aix Marseille Université)
    Abstract: Heckman and MaCurdy (1985) first showed that binary outcomes are compatible with linear econometric models of interactions. This key insight was unduly discarded by the literature on the econometrics of games. We consider general models of linear interactions in binary outcomes that nest linear models of peer effects in networks and linear models of entry games. We characterize when these models are well defined. Errors must have a specific discrete structure. We then analyze the models' game-theoretic microfoundations. Under complete information and linear utilities, we characterize the preference shocks under which the linear model of interactions forms a Nash equilibrium of the game. Under incomplete information and independence, we show that the linear model of interactions forms a Bayes-Nash equilibrium if and only if preference shocks are iid and uniformly distributed. We also obtain conditions for uniqueness. Finally, we propose two simple consistent estimators. We revisit the empirical analyses of teenage smoking and peer effects of Lee, Li, and Lin (2014) and of entry into airline markets of Ciliberto and Tamer (2009). Our reanalyses showcase the main interests of the linear framework and suggest that the estimations in these two studies suffer from endogeneity problems.
    Keywords: Binary Outcomes,Linear Probability Model,Peer Effects,Econometrics of Games
    Date: 2020–11
  13. By: Gian Paolo Clemente; Alessandra Cornaro
    Abstract: We provide a framework for detecting relevant insurance companies in a systemic risk perspective. Among the alternative methodologies for measuring systemic risk, we propose a complex network approach where insurers are linked to form a global interconnected system. We model the reciprocal influence between insurers calibrating edge weights on the basis of specific risk measures. Therefore, we provide a suitable network indicator, the Weighted Effective Resistance Centrality, able to catch which is the effect of a specific vertex on the network robustness. By means of this indicator, we assess the prominence of a company in spreading and receiving risk from the others.
    Date: 2020–11
  14. By: Hylke Vandenbussche; William Connell Garcia; Wouter Simons
    Abstract: We develop a network trade model with country-sector level input-output linkages. It includes (1) domestic and global value chain linkages between all country-sectors, (2) direct as well as indirect shipments (via other sectors and countries) to a final destination, (3) value added rather than gross trade flows. The model is solved analytically and we use the sectoral World Input Output Database (WIOD) to predict the impact of Brexit for every individual EU country by aggregating up the country-sector effects. In contrast to other studies, we find EU-27 job losses to be substantially higher than hitherto believed as a result of the closely integrated EU network structure. Upstream country-sectors stand to lose more from Brexit due to their network centrality in Europe.
    Keywords: JEL C530, JEL D570, JEL F170, JEL F140, global value chains, trade shocks, jobs, employment, Brexit
    Date: 2019–01–01
  15. By: Díaz, Carlos (Catholic University of Uruguay); Patacchini, Eleonora (Cornell University)
    Abstract: We study the interplay between parental and peer socialization in shaping criminal behavior among adolescents. We develop a simple cultural transmission model where parents affect how society influences their children's decisions. The model predicts that parental and peer socialization are substitutes in the development of juvenile crime. We then take the model to the data using information on a representative sample of adolescents in the United States. Using the geographical distances be- tween residential addresses of individuals in the same grade and school to measure peer influences, we find that negative peer effects on juvenile crime are significantly lower for teenagers with engaged mothers. Consistently with the prediction of our model, this evidence reveals an important role of parents in mediating the impact of neighborhoods on youth crime. The influence of parents is especially important for drug trafficking, assault and battery.
    Keywords: neighborhood peer effects, juvenile delinquency, parental involvement
    JEL: J13 K42 R11 R23 Z13
    Date: 2020–11
  16. By: Ryan M. Hynes (School of Economics, University College Dublin); Bernardo S. Buarque (Spatial Dynamics Lab, University College Dublin); Ronald B. Davies (School of Economics, University College Dublin); Dieter F. Kogler (Spatial Dynamics Lab, University College Dublin)
    Abstract: Perhaps more than any other product, beer evokes the place it was made. Weißbier and Germany, dubbels and Belgium, and most of all, Guinness and Ireland. Part of what makes these beers so memorable is what sets them apart and gives them their ‘taste of place’. Many studies have tried to place that taste, and due to a lack of detailed data, have relied largely on qualitative methods to do so. We introduce a novel data set of regionalized beer recipes, styles, and ingredients collected from a homebrewing website. We then turn to the methods of evolutionary economic geography to create regional ingredient networks for recipes within a style of beer, and identify which ingredients are most important to certain styles. Along with identifying these keystone ingredients, we calculate a style’s resiliency or reliance on one particular ingredient. We compare this resiliency within similar styles in different regions and across different styles in the same region to isolate the effects of region on ingredient choice. We find that while almost all beer styles have only a handful of key ingredients, some styles are more resilient than others due to readily available substitute ingredients in their region.
    Keywords: Beer, Economic Geography, Network Analysis
    JEL: Q10 R11
    Date: 2020–11–12
  17. By: Ahmad Lashkaripour (Indiana University); Mostafa Beshkar (Indiana University)
    Abstract: As trade agreements face renewed pressure, we show that the rise of global value chains has multiplied the value of trade agreements to unprecedented levels. We cast our argument using a non-parametric neoclassical trade model that accommodates global input-output networks and nests a wide class of quantitative trade models as a special case. To guide our analysis, we derive analytic formulas for optimal non-cooperative trade taxes in this general framework. These formulas predict the extent of trade restriction if global trade agreements were to dissolve. Mapping these formulas to data, we quantify the value of trade agreements for various countries. We find that the disintegration of existing trade agreements will erase 30% of the overall gains from trade, which amounts to a $2.7 trillion loss in global GDP. Around 41% of this value is driven by the agreements’ facilitation of global value chains.
    Date: 2020–05
  18. By: Daniel Felix Ahelegbey (University of Pavia); Oyakhilome Wallace Ibhagui (Baum Tenpers Research Institute)
    Abstract: We investigate the dynamic interconnectedness among the major world cross-currency basis swap spreads during tranquil and turbulent times. We examine whether movements in the bases are merely anecdotal or provide evidence of contagion, the most central basis for spillover propagation, and implications for market participants. The result shows a high degree of interconnectedness among the bases in crisis periods with mark-to-market losses for existing exposures and large arbitrage opportunities for investors seeking new positions. We find evidence that spillovers in the bases propagate from the Euro, the Swiss franc, and the Danish krone to other bases.
    Keywords: Covered Interest Parity, Cross-currency Basis, Currency Swaps, Dollar Funding, Financial Crisis, Interconnectedness, VAR Model.
    JEL: C11 C32 F31 G01 G15
    Date: 2020–09

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