A dynamic network model with persistent links and node-specific latent variables, with an application to the interbank market
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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)
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.
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- On the analysis of fitness change: fitness-popularity dynamic network model with varying fitness
- New reliability model for complex systems based on stochastic processes and survival signature
- On the equivalence between the kinetic Ising model and discrete autoregressive processes
- Tail Granger causalities and where to find them: extreme risk spillovers vs spurious linkages
- The dynamic factor network model with an application to international trade
- Do banks change their liquidity ratios based on network characteristics?
- Network analysis of the e-MID overnight money market: the informational value of different aggregation levels for intrinsic dynamic processes
- Analytical formulation for explaining the variations in traffic states: a fundamental diagram modeling perspective with stochastic parameters
- Investigating competition in financial markets: a sparse autologistic model for dynamic network data
- Dynamic interbank network analysis using latent space models
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