The Spread of the Credit Crisis: View from a Stock Correlation Network

TL;DR

This paper investigates how the 2008 credit crisis propagated through US stock markets by analyzing stock correlation networks, revealing epidemic-like cascades and dependencies in stock returns.

Contribution

It introduces a network-based empirical approach to model the spread of financial crises using stock correlations and topological measures.

Findings

Stock returns exhibit cascade-like behavior during the crisis.

Graphical network displays reveal epidemic flow patterns.

Dependence of returns on network topology is significant.

Abstract

The credit crisis roiling the world's financial markets will likely take years and entire careers to fully understand and analyze. A short empirical investigation of the current trends, however, demonstrates that the losses in certain markets, in this case the US equity markets, follow a cascade or epidemic flow like model along the correlations of various stocks. This phenomenon will be shown by the graphical display of stock returns across the network as well as the dependence of stock returns on topological measures. Finally, whether the idea of "epidemic" or a "cascade" is a metaphor or model for this crisis will be discussed.