Multi-layered Network Structure: Relationship Between Financial and Macroeconomic Dynamics

TL;DR

This paper uses multi-layered network analysis to reveal empirical linkages between financial market dynamics and macroeconomic variables across countries, highlighting core-periphery structures and relationships with economic complexity and trade.

Contribution

It introduces a novel multi-layered network approach combining data science and econometrics to study the interconnectedness of financial and macroeconomic systems.

Findings

Financial and macroeconomic networks are empirically linked across countries.

Core-periphery structures in networks involve similar countries, related to the gravity model.

Trade connectivity correlates with higher financial return correlations.

Abstract

We demonstrate using multi-layered networks, the existence of an empirical linkage between the dynamics of the financial network constructed from the market indices and the macroeconomic networks constructed from macroeconomic variables such as trade, foreign direct investments, etc. for several countries across the globe. The temporal scales of the dynamics of the financial variables and the macroeconomic fundamentals are very different, which make the empirical linkage even more interesting and significant. Also, we find that there exist in the respective networks, core-periphery structures (determined through centrality measures) that are composed of the similar set of countries -- a result that may be related through the `gravity model' of the country-level macroeconomic networks. Thus, from a multi-lateral openness perspective, we elucidate that for individual countries, larger trade connectivity is positively associated with higher financial return correlations. Furthermore, we show that the Economic Complexity Index and the equity markets have a positive relationship among themselves, as is the case for Gross Domestic Product. The data science methodology using network theory, coupled with standard econometric techniques constitute a new approach to studying multi-level economic phenomena in a comprehensive manner.