What a network measure can tell us about financial interconnectedness and output volatility
Date
2020
Authors
Xu, Ying
Corbett, Jenny
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Publisher
Academic Press
Abstract
This paper applies the PageRank algorithm, often used in network analysis, to capture multidimensional and
high-degree, cross-border banking relations among countries. It provides a nuanced picture of financial interconnectedness that has not been available in the literature to date.Our measure, FIRank, shows the probability of
connection to the network by any country or, equivalently, the share of all connections captured by each
country, and provides relative rankings of countries according to their degree of interconnectedness. We show
that the United Kingdom and the United States remain the ‘core’ in the global banking network over a thirtythree-year period, with most countries scattered in the ‘periphery’ despite considerable growth and change in the
network.This finding contrasts with claims of an increasingly even distribution of connections reported in other
studies using more limited network measures. Examining whether financial interconnectedness raises or lowers
output volatility, we show that the relationship is nonlinear: initially, higher interconnectedness raises volatility,
but beyond a critical level volatility is reduced. This is true in periods of smaller and idiosyncratic shocks but is
even more pronounced in the GFC period of large shocks. The novelty of our approach lies in applying wellunderstood network measures to cross-border banking data to identify where countries rank in international
financial interconnectedness with the global bank-lending network.Further, by explicitly analysing how the
relative interconnectedness index is related to output volatility we provide new insights into the pros and cons of
higher levels of international financial interconnection.
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Keywords
Financial integration, Financial networks, Network analysis, Cross-border banking, Output volatility, PageRank
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Source
Journal of the Japanese and International Economies
Type
Journal article
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Restricted until
2099-12-31
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