A New Look at Calendar Anomalies: Multifractality and Day-of-the-Week Effect.

Stock markets can become inefficient due to calendar anomalies known as the day-of-the-week effect. Calendar anomalies are well known in the financial literature, but the phenomena remain to be explored in econophysics. This paper uses multifractal analysis to evaluate if the temporal dynamics of market returns also exhibit calendar anomalies such as day-of-the-week effects. We apply multifractal detrended fluctuation analysis (MF-DFA) to the daily returns of market indices worldwide for each day of the week. Our results indicate that distinct multifractal properties characterize individual days of the week. Monday returns tend to exhibit more persistent behavior and richer multifractal structures than other day-resolved returns. Shuffling the series reveals that multifractality arises from a broad probability density function and long-term correlations. The time-dependent multifractal analysis shows that the Monday returns' multifractal spectra are much wider than those of other days. This behavior is especially persistent during financial crises. The presence of day-of-the-week effects in multifractal dynamics of market returns motivates further research on calendar anomalies for distinct market regimes.

Socio-Economic Impact of the Covid-19 Pandemic in the U.S.

This paper proposes a dynamic cascade model to investigate the systemic risk posed by sector-level industries within the U.S. inter-industry network. We then use this model to study the effect of the disruptions presented by Covid-19 on the U.S. economy. We construct a weighted digraph G = (V,E,W) using the industry-by-industry total requirements table for 2018, provided by the Bureau of Economic Analysis (BEA). We impose an initial shock that disrupts the production capacity of one or more industries, and we calculate the propagation of production shortages with a modified Cobb-Douglas production function. For the Covid-19 case, we model the initial shock based on the loss of labor between March and April 2020 as reported by the Bureau of Labor Statistics (BLS). The industries within the network are assigned a resilience that determines the ability of an industry to absorb input losses, such that if the rate of input loss exceeds the resilience, the industry fails, and its outputs go to zero. We observed a critical resilience, such that, below this critical value, the network experienced a catastrophic cascade resulting in total network collapse. Lastly, we model the economic recovery from June 2020 through March 2021 using BLS data.

Systemic stress test model for shared portfolio networks.

We propose a dynamic model for systemic risk using a bipartite network of banks and assets in which the weight of links and node attributes vary over time. Using market data and bank asset holdings, we are able to estimate a single parameter as an indicator of the stability of the financial system. We apply the model to the European sovereign debt crisis and observe that the results closely match real-world events (e.g., the high risk of Greek sovereign bonds and the distress of Greek banks). Our model could become complementary to existing stress tests, incorporating the contribution of interconnectivity of the banks to systemic risk in time-dependent networks. Additionally, we propose an institutional systemic importance ranking, BankRank, for the financial institutions analyzed in this study to assess the contribution of individual banks to the overall systemic risk.

Mitigation of cascading failures in complex networks.

Cascading failures in many systems such as infrastructures or financial networks can lead to catastrophic system collapse. We develop here an intuitive, powerful and simple-to-implement approach for mitigation of cascading failures on complex networks based on local network structure. We offer an algorithm to select critical nodes, the protection of which ensures better survival of the network. We demonstrate the strength of our approach compared to various standard mitigation techniques. We show the efficacy of our method on various network structures and failure mechanisms, and finally demonstrate its merit on an example of a real network of financial holdings.

Publisher Correction: Relationship between Macroeconomic Indicators and Economic Cycles in U.S.

An amendment to this paper has been published and can be accessed via a link at the top of the paper.

Relationship between Macroeconomic Indicators and Economic Cycles in U.S.

We analyze monthly time series of 57 US macroeconomic indicators (18 leading, 30 coincidental, and 9 lagging) and 5 other trade/money indexes. Using novel methods, we confirm statistically significant co-movements among these time series and identify noteworthy economic events. The methods we use are Complex Hilbert Principal Component Analysis (CHPCA) and Rotational Random Shuffling (RRS). We obtain significant complex correlations among the US economic indicators with leads/lags. We then use the Hodge decomposition to obtain the hierarchical order of each time series. The Hodge potential allows us to better understand the lead/lag relationships. Using both CHPCA and Hodge decomposition approaches, we obtain a new lead/lag order of the macroeconomic indicators and perform clustering analysis for positively serially correlated positive and negative changes of the analyzed indicators. We identify collective negative co-movements around the Dot.com bubble in 2001 as well as the Global Financial Crisis (GFC) in October 2008. We also identify important events such as the Hurricane Katrina in August 2005 and the Oil Price Crisis in July 2008. Additionally, we demonstrate that some coincidental and lagging indicators actually show leading indicator characteristics. This suggests that there is a room for existing indicators to be improved.

Confidence and self-attribution bias in an artificial stock market.

Using an agent-based model we examine the dynamics of stock price fluctuations and their rates of return in an artificial financial market composed of fundamentalist and chartist agents with and without confidence. We find that chartist agents who are confident generate higher price and rate of return volatilities than those who are not. We also find that kurtosis and skewness are lower in our simulation study of agents who are not confident. We show that the stock price and confidence index-both generated by our model-are cointegrated and that stock price affects confidence index but confidence index does not affect stock price. We next compare the results of our model with the S&P 500 index and its respective stock market confidence index using cointegration and Granger tests. As in our model, we find that stock prices drive their respective confidence indices, but that the opposite relationship, i.e., the assumption that confidence indices drive stock prices, is not significant.

Interdependencies and Causalities in Coupled Financial Networks.

We explore the foreign exchange and stock market networks for 48 countries from 1999 to 2012 and propose a model, based on complex Hilbert principal component analysis, for extracting significant lead-lag relationships between these markets. The global set of countries, including large and small countries in Europe, the Americas, Asia, and the Middle East, is contrasted with the limited scopes of targets, e.g., G5, G7 or the emerging Asian countries, adopted by previous works. We construct a coupled synchronization network, perform community analysis, and identify formation of four distinct network communities that are relatively stable over time. In addition to investigating the entire period, we divide the time period into into "mild crisis," (1999-2002), "calm," (2003-2006) and "severe crisis" (2007-2012) sub-periods and find that the severe crisis period behavior dominates the dynamics in the foreign exchange-equity synchronization network. We observe that in general the foreign exchange market has predictive power for the global stock market performances. In addition, the United States, German and Mexican markets have forecasting power for the performances of other global equity markets.

Multiple tipping points and optimal repairing in interacting networks.

Systems composed of many interacting dynamical networks-such as the human body with its biological networks or the global economic network consisting of regional clusters-often exhibit complicated collective dynamics. Three fundamental processes that are typically present are failure, damage spread and recovery. Here we develop a model for such systems and find a very rich phase diagram that becomes increasingly more complex as the number of interacting networks increases. In the simplest example of two interacting networks we find two critical points, four triple points, ten allowed transitions and two 'forbidden' transitions, as well as complex hysteresis loops. Remarkably, we find that triple points play the dominant role in constructing the optimal repairing strategy in damaged interacting systems. To test our model, we analyse an example of real interacting financial networks and find evidence of rapid dynamical transitions between well-defined states, in agreement with the predictions of our model.

Cohesiveness in financial news and its relation to market volatility.

Motivated by recent financial crises, significant research efforts have been put into studying contagion effects and herding behaviour in financial markets. Much less has been said regarding the influence of financial news on financial markets. We propose a novel measure of collective behaviour based on financial news on the Web, the News Cohesiveness Index (NCI), and we demonstrate that the index can be used as a financial market volatility indicator. We evaluate the NCI using financial documents from large Web news sources on a daily basis from October 2011 to July 2013 and analyse the interplay between financial markets and finance-related news. We hypothesise that strong cohesion in financial news reflects movements in the financial markets. Our results indicate that cohesiveness in financial news is highly correlated with and driven by volatility in financial markets.

Cascading failures in bi-partite graphs: model for systemic risk propagation.

As economic entities become increasingly interconnected, a shock in a financial network can provoke significant cascading failures throughout the system. To study the systemic risk of financial systems, we create a bi-partite banking network model composed of banks and bank assets and propose a cascading failure model to describe the risk propagation process during crises. We empirically test the model with 2007 US commercial banks balance sheet data and compare the model prediction of the failed banks with the real failed banks after 2007. We find that our model efficiently identifies a significant portion of the actual failed banks reported by Federal Deposit Insurance Corporation. The results suggest that this model could be useful for systemic risk stress testing for financial systems. The model also identifies that commercial rather than residential real estate assets are major culprits for the failure of over 350 US commercial banks during 2008-2011.

Identifying influential directors in the United States corporate governance network.

The influence of directors has been one of the most engaging topics recently, but surprisingly little research has been done to quantitatively evaluate the influence and power of directors. We analyze the structure of the US corporate governance network for the 11-year period 1996-2006 based on director data from the Investor Responsibility Research Center director database, and we develop a centrality measure named the influence factor to estimate the influence of directors quantitatively. The US corporate governance network is a network of directors with nodes representing directors and links between two directors representing their service on common company boards. We assume that information flows in the network through information-sharing processes among linked directors. The influence factor assigned to a director is based on the level of information that a director obtains from the entire network. We find that, contrary to commonly accepted belief that directors of large companies, measured by market capitalization, are the most powerful, in some instances, the directors who are influential do not necessarily serve on boards of large companies. By applying our influence factor method to identify the influential people contained in the lists created by popular magazines such as Fortune, Networking World, and Treasury and Risk Management, we find that the influence factor method is consistently either the best or one of the two best methods in identifying powerful people compared to other general centrality measures that are used to denote the significance of a node in complex network theory.