Utilizing Graphical Models to Measure Systemic Risk in Taiwan

Graphical model of granger causality on Taiwan stocks as measure of systemic risk

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	Utilizing Graphical Models to Measure Systemic Risk in Taiwan (pdf)	7.41 M

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Graphical model

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Understanding financial systemic risk has been crucial in both theoretical and practical finance since the 2008 financial crisis. The Granger Causality graphical model allows the elucidation of the network of relations and visualizes risk propagation, and is useful in studying and discovering connections between companies (Billio et al., 2012). In this study, we consider the case of the Taiwan stock market and examine the dynamics of a relations network comprising the 30 top largest market capitals of Taiwanese companies from January 1, 1986, to July 31, 2024. Furthermore, by measuring network connectivity, we identify an early warning mechanism for significant losses, providing vital insights for risk management for large financial institutions and asset allocation by individual investors.