Compound poisson models for weighted networks with applications in finance

Gandy, Axel and Veraart, Luitgard A. M. ORCID: 0000-0003-1183-2227 (2021) Compound poisson models for weighted networks with applications in finance. Mathematics and Financial Economics, 15 (1). 131 - 153. ISSN 1862-9679

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Abstract

We develop a modelling framework for estimating and predicting weighted network data. The edge weights in weighted networks often arise from aggregating some individual relationships be- tween the nodes. Motivated by this, we introduce a modelling framework for weighted networks based on the compound Poisson distribution. To allow for heterogeneity between the nodes, we use a regression approach for the model parameters. We test the new modelling framework on two types of financial networks: a network of financial institutions in which the edge weights represent exposures from trading Credit Default Swaps and a network of countries in which the edge weights represent cross-border lending. The compound Poisson Gamma distributions with regression fit the data well in both situations. We illustrate how this modelling framework can be used for predicting unobserved edges and their weights in an only partially observed network. This is for example relevant for assessing systemic risk in financial networks.

Item Type:	Article
Official URL:	https://www.springer.com/journal/11579
Additional Information:	© 2020 The Authors
Divisions:	Mathematics
Subjects:	Q Science > QA Mathematics H Social Sciences > HG Finance
JEL classification:	C - Mathematical and Quantitative Methods > C0 - General > C02 - Mathematical Methods C - Mathematical and Quantitative Methods > C4 - Econometric and Statistical Methods: Special Topics > C46 - Econometric and Statistical Methods: Specific Distributions C - Mathematical and Quantitative Methods > C5 - Econometric Modeling > C53 - Forecasting and Other Model Applications D - Microeconomics > D8 - Information, Knowledge, and Uncertainty > D85 - Network Formation and Analysis: Theory G - Financial Economics > G3 - Corporate Finance and Governance > G32 - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure
Date Deposited:	29 Apr 2020 15:36
Last Modified:	16 Apr 2024 23:24
URI:	http://eprints.lse.ac.uk/id/eprint/104185

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