Causal Hierarchy in the Financial Market Network -- Uncovered by the Helmholtz-Hodge-Kodaira Decomposition
Abstract
Granger causality can uncover the cause and effect relationships in financial networks. However, such networks can be convoluted and difficult to interpret, but the Helmholtz-Hodge-Kodaira decomposition can split them into a rotational and gradient component which reveals the hierarchy of Granger causality flow. Using Kenneth French's business sector return time series, it is revealed that during the Covid crisis, precious metals and pharmaceutical products are causal drivers of the financial network. Moreover, the estimated Granger causality network shows a high connectivity during crisis which means that the research presented here can be especially useful to better understand crises in the market by revealing the dominant drivers of the crisis dynamics.
- Publication:
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arXiv e-prints
- Pub Date:
- August 2024
- DOI:
- 10.48550/arXiv.2408.12839
- arXiv:
- arXiv:2408.12839
- Bibcode:
- 2024arXiv240812839W
- Keywords:
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- Quantitative Finance - Statistical Finance;
- Physics - Data Analysis;
- Statistics and Probability;
- Statistics - Applications