Network-centric indicators for fragility in global financial indices

TL;DR

This paper uses network analysis of global financial indices from 2000 to 2014 to identify market fragility and critical events by examining correlation structures and network measures during crashes and bubbles.

Contribution

It introduces a network-based framework with edge curvature measures to monitor financial market fragility and analyze the impact of crises on index interactions.

Findings

Network measures reveal increased fragility during crises.

Edge curvature measures effectively detect market instability.

Structural differences distinguish normal periods from crashes and bubbles.

Abstract

Over the last two decades, financial systems have been studied and analysed from the perspective of complex networks, where the nodes and edges in the network represent the various financial components and the strengths of correlations between them. Here, we adopt a similar network-based approach to analyse the daily closing prices of 69 global financial market indices across 65 countries over a period of 2000-2014. We study the correlations among the indices by constructing threshold networks superimposed over minimum spanning trees at different time frames. We investigate the effect of critical events in financial markets (crashes and bubbles) on the interactions among the indices by performing both static and dynamic analyses of the correlations. We compare and contrast the structures of these networks during periods of crashes and bubbles, with respect to the normal periods in the market. In addition, we study the temporal evolution of traditional market indicators, various global network measures and the recently developed edge-based curvature measures. We show that network-centric measures can be extremely useful in monitoring the fragility in the global financial market indices.