Carbon-dioxide emissions trading and hierarchical structure in worldwide finance and commodities markets

Change in hierarchy of the financial networks: A study on firms of an emerging market in Bangladesh

We investigate the hierarchical structure of Dhaka stocks' financial networks, known as an emerging market, from 2008 to 2020. To do so, we determine correlations from the returns of the firms over a one-year time window. Then, we construct a minimum spanning tree (MST) from correlations and calculate the hierarchy of the tree using the hierarchical path. We find that during the unprecedented crisis in 2010-11, the hierarchy of this emerging market did not sharply increase like in developed markets, implying the absence of a compact cluster in the center of the tree. Noticeably, the hierarchy fell before the big crashes in the Bangladeshi local market, and the lowest value was found in 2010, just before the 2011 Bangladesh market scam. We also observe a lower hierarchical MST during COVID-19, which implies that the network is fragile and vulnerable to financial crises not seen in developed markets. Moreover, the volatility in the topological indicators of the MST indicates that the network is adequately responding to crises and that the firms that play an important role in the market during our analysis periods are financial, particularly the insurance companies. We notice that the largest degrees are minimal compared to the total number of nodes in the tree, implying that the network nodes are somewhat locally compact rather than globally centrally coupled. For this random structure of the emerging market, the network properties do not properly reflect the hierarchy, especially during crises. Identifying hierarchies, topological indicators, and significant firms will be useful for understanding the movement of an emerging market like Dhaka Stock exchange (DSE), which will be useful for policymakers to develop the market.

Spatial Distribution of Multi-Fractal Scaling Behaviours of Atmospheric XCO2 Concentration Time Series during 2010-2018 over China

Exploring the spatial distribution of the multi-fractal scaling behaviours in atmospheric CO₂ concentration time series is useful for understanding the dynamic mechanisms of carbon emission and absorption. In this work, we utilise a well-established multi-fractal detrended fluctuation analysis to examine the multi-fractal scaling behaviour of a column-averaged dry-air mole fraction of carbon dioxide (XCO₂) concentration time series over China, and portray the spatial distribution of the multi-fractal scaling behaviour. As XCO₂ data values from the Greenhouse Gases Observing Satellite (GOSAT) are insufficient, a spatio-temporal thin plate spline interpolation method is applied. The results show that XCO₂ concentration records over almost all of China exhibit a multi-fractal nature. Two types of multi-fractal sources are detected. One is long-range correlations, and the other is both long-range correlations and a broad probability density function; these are mainly distributed in southern and northern China, respectively. The atmospheric temperature and carbon emission/absorption are two possible external factors influencing the multi-fractality of the atmospheric XCO₂ concentration. Highlight: (1) An XCO₂ concentration interpolation is conducted using a spatio-temporal thin plate spline method. (2) The spatial distribution of the multi-fractality of XCO₂ concentration over China is shown. (3) Multi-fractal sources and two external factors affecting multi-fractality are analysed.

Understanding Changes in the Topology and Geometry of Financial Market Correlations during a Market Crash

In econophysics, the achievements of information filtering methods over the past 20 years, such as the minimal spanning tree (MST) by Mantegna and the planar maximally filtered graph (PMFG) by Tumminello et al., should be celebrated. Here, we show how one can systematically improve upon this paradigm along two separate directions. First, we used topological data analysis (TDA) to extend the notions of nodes and links in networks to faces, tetrahedrons, or k-simplices in simplicial complexes. Second, we used the Ollivier-Ricci curvature (ORC) to acquire geometric information that cannot be provided by simple information filtering. In this sense, MSTs and PMFGs are but first steps to revealing the topological backbones of financial networks. This is something that TDA can elucidate more fully, following which the ORC can help us flesh out the geometry of financial networks. We applied these two approaches to a recent stock market crash in Taiwan and found that, beyond fusions and fissions, other non-fusion/fission processes such as cavitation, annihilation, rupture, healing, and puncture might also be important. We also successfully identified neck regions that emerged during the crash, based on their negative ORCs, and performed a case study on one such neck region.

Does network topology influence systemic risk contribution? A perspective from the industry indices in Chinese stock market

This study considers the effect of an industry's network topology on its systemic risk contribution to the stock market using data from the CSI 300 two-tier industry indices from the Chinese stock market. We first measure industry's conditional-value-at-risk (CoVaR) and the systemic risk contribution (ΔCoVaR) using the fitted time-varying t-copula function. The network of the stock industry is established based on dynamic conditional correlations with the minimum spanning tree. Then, we investigate the connection characteristics and topology of the network. Finally, we utilize seemingly unrelated regression estimation (SUR) of panel data to analyze the relationship between network topology of the stock industry and the industry's systemic risk contribution. The results show that the systemic risk contribution of small-scale industries such as real estate, food and beverage, software services, and durable goods and clothing, is higher than that of large-scale industries, such as banking, insurance and energy. Industries with large betweenness centrality, closeness centrality, and clustering coefficient and small node occupancy layer are associated with greater systemic risk contribution. In addition, further analysis using a threshold model confirms that the results are robust.

Systemic risk and hierarchical transitions of financial networks

In this paper, the change in topological hierarchy, which is measured by the minimum spanning tree constructed from the cross-correlations between the stock indices from the S & P 500 for 1998-2012 in a one year moving time window, was used to analyze a financial crisis. The hierarchy increased in all minor crises in the observation time window except for the sharp crisis of 2007-2008 when the global financial crisis occurred. The sudden increase in hierarchy just before the global financial crisis can be used for the early detection of an upcoming crisis. Clearly, the higher the hierarchy, the higher the threats to financial stability. The scaling relations were developed to observe the changes in hierarchy with the network topology. These scaling relations can also identify and quantify the financial crisis periods, and appear to contain the predictive power of an upcoming crisis.

Minimum spanning tree filtering of correlations for varying time scales and size of fluctuations

Based on a recently proposed q-dependent detrended cross-correlation coefficient, ρ_{q} [J. Kwapień, P. Oświęcimka, and S. Drożdż, Phys. Rev. E 92, 052815 (2015)PLEEE81539-375510.1103/PhysRevE.92.052815], we generalize the concept of the minimum spanning tree (MST) by introducing a family of q-dependent minimum spanning trees (qMSTs) that are selective to cross-correlations between different fluctuation amplitudes and different time scales of multivariate data. They inherit this ability directly from the coefficients ρ_{q}, which are processed here to construct a distance matrix being the input to the MST-constructing Kruskal's algorithm. The conventional MST with detrending corresponds in this context to q=2. In order to illustrate their performance, we apply the qMSTs to sample empirical data from the American stock market and discuss the results. We show that the qMST graphs can complement ρ_{q} in disentangling "hidden" correlations that cannot be observed in the MST graphs based on ρ_{DCCA}, and therefore, they can be useful in many areas where the multivariate cross-correlations are of interest. As an example, we apply this method to empirical data from the stock market and show that by constructing the qMSTs for a spectrum of q values we obtain more information about the correlation structure of the data than by using q=2 only. More specifically, we show that two sets of signals that differ from each other statistically can give comparable trees for q=2, while only by using the trees for q≠2 do we become able to distinguish between these sets. We also show that a family of qMSTs for a range of q expresses the diversity of correlations in a manner resembling the multifractal analysis, where one computes a spectrum of the generalized fractal dimensions, the generalized Hurst exponents, or the multifractal singularity spectra: the more diverse the correlations are, the more variable the tree topology is for different q's. As regards the correlation structure of the stock market, our analysis exhibits that the stocks belonging to the same or similar industrial sectors are correlated via the fluctuations of moderate amplitudes, while the largest fluctuations often happen to synchronize in those stocks that do not necessarily belong to the same industry.

Realized volatility and absolute return volatility: a comparison indicating market risk

Measuring volatility in financial markets is a primary challenge in the theory and practice of risk management and is essential when developing investment strategies. Although the vast literature on the topic describes many different models, two nonparametric measurements have emerged and received wide use over the past decade: realized volatility and absolute return volatility. The former is strongly favored in the financial sector and the latter by econophysicists. We examine the memory and clustering features of these two methods and find that both enable strong predictions. We compare the two in detail and find that although realized volatility has a better short-term effect that allows predictions of near-future market behavior, absolute return volatility is easier to calculate and, as a risk indicator, has approximately the same sensitivity as realized volatility. Our detailed empirical analysis yields valuable guidelines for both researchers and market participants because it provides a significantly clearer comparison of the strengths and weaknesses of the two methods.