Two Essays in Financial Network Analysis

Abstract

This thesis comprises two interrelated essays that explore distinct yet complementary aspects of financial network analysis. The first essay studies network sparsity and its impacts, shedding light on how the structural characteristics of financial networks influence inter-agent network impact. Meanwhile, the second essay delves into peer effects in corporate risk-taking, examining how behaviors and decisions within a network of firms can propagate and shape corporate strategies.

In the first essay, we investigate the relationship between sparsity in the weight matrix and network impact. This is the first paper to examine how the sparsity in the weight matrix affects the relationship between the explanatory variable for one agent and the dependent variable in all other agents. We derive the closed-form solution of the relationship between sparsity and network impact under the invariant network topology of sparse network with complete core-periphery components or some specific incomplete core-periphery components. We prove that a reduction in sparsity would increase network impacts under the network structure with complete core-periphery components by three basic approaches of sparsity reduction. For the network with specific incomplete core-periphery components, we prove the result related to Average Total Impact and show other impacts’ results based on the simulation method. We show the financial network use the simulation method under the network structure with random core-periphery components and arbitrary random network. We apply our analytical framework to study the decoupling impact between US and Chinese trade flows and find that the Average Indirect Impact would be decreased by 20 percent if the trade flows would be completely cut off.

In the second essay, we study whether corporate risk - taking is influenced by peer behaviors through the product - market network. Firms tend to take more risks if they observe higher risk - taking among peer companies. We also find that firms with less talented CEOs and poor performance are more inclined to learn from their peers. Firms with better governance also show a greater propensity to emulate their peers. Additionally, firms operating in more competitive industries and facing severe financial constraints are more likely to follow their peers. Our conclusion remains robust under alternative network identifications, including the endogenous selection of peers.

Taken together, two essays provide a cohesive examination of financial networks, where the structure and dynamics of connections play critical roles in shaping economic and financial outcomes. By addressing both the topological properties of networks and the behavioral responses within them, this thesis offers a comprehensive understanding of how financial networks operate and affect economic and corporate landscapes.

Date of Award	21 May 2025
Original language	English
Awarding Institution	City University of Hong Kong
Supervisor	Yue MA (Supervisor)