A dynamic network model with persistent links and node-specific latent variables, with an application to the interbank market
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Publication:2329477
DOI10.1016/J.EJOR.2019.07.024zbMATH Open1430.90176arXiv1801.00185OpenAlexW2962798205WikidataQ127478262 ScholiaQ127478262MaRDI QIDQ2329477FDOQ2329477
Authors: Piero Mazzarisi, Paolo Barucca, Fabrizio Lillo, D. Tantari 
Publication date: 17 October 2019
Published in: European Journal of Operational Research (Search for Journal in Brave)
Abstract: We propose a dynamic network model where two mechanisms control the probability of a link between two nodes: (i) the existence or absence of this link in the past, and (ii) node-specific latent variables (dynamic fitnesses) describing the propensity of each node to create links. Assuming a Markov dynamics for both mechanisms, we propose an Expectation-Maximization algorithm for model estimation and inference of the latent variables. The estimated parameters and fitnesses can be used to forecast the presence of a link in the future. We apply our methodology to the e-MID interbank network for which the two linkage mechanisms are associated with two different trading behaviors in the process of network formation, namely preferential trading and trading driven by node-specific characteristics. The empirical results allow to recognise preferential lending in the interbank market and indicate how a method that does not account for time-varying network topologies tends to overestimate preferential linkage.
Full work available at URL: https://arxiv.org/abs/1801.00185
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Applications of Markov chains and discrete-time Markov processes on general state spaces (social mobility, learning theory, industrial processes, etc.) (60J20) Markov processes: estimation; hidden Markov models (62M05) Stochastic network models in operations research (90B15) Financial applications of other theories (91G80)
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Cited In (14)
- Counterparty choice, maturity shifts and market freezes: lessons from the European interbank market
- On the analysis of fitness change: fitness-popularity dynamic network model with varying fitness
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