Systemic Risk and Trading Strategy Based on Correlation-Based Networks in Stock Markets
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In this paper, we construct five systemic risk indicators and test their performances based on four different datasets. It is observed that the five indicators can accurately indicate the increment of systemic risks during the periods of sub-prime crisis and European debt crisis. Trading strategies based on the risk indicators are further designed to test the warning ability of future price drops. The backtests reveal that trading based on the five indicators provides satisfied excess returns when the trading costs are included. Our results provide insights to find new network-based risk indicators to early warn the systemic risks in financial markets.
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