Modelling Inter-country Spatial Financial Interaction with Graphical Lasso: An application to Sovereign co-risk Evaluation

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2 Citations (Scopus)

Abstract

We propose a model to extract significant risk spatial interactions between countries adopting the Graphical Lasso algorithm, used in graph theory to sort out spurious conditional correlations. In this context, the major issue is the definition of the penalization parameter. We propose a search algorithm aimed at the best separation of the variables (expressed in terms of conditional dependence) given an a priori desired partition. The case study focuses on Credit Default Swap (CDS) returns over the period 2009–2017. The proposed algorithm is used to estimate the spatial systemic risk relationship between Peripheral and Core Countries in the Euro Area.
Original languageEnglish
Pages (from-to)72-79
Number of pages8
JournalRegional Science and Urban Economics
Volume70
DOIs
Publication statusPublished - 2018

Keywords

  • Network dependence
  • Spatial conditional dependence
  • Systemic risk
  • regional financial contagion

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