Co-Evolution of Cross-border Portfolio Investment Networks and Indicators for Financial Crises

Two financial networks, namely, cross-border long-term debt and equity securities portfolio investment networks are analysed. They serve as proxies for measuring the interdependence of financial markets and the robustness of the global financial system from 2002 to 2012, covering the 2008 global financial crisis. Focusing on the largest strongly-connected core component of the threshold network, while the edge threshold is set according to the percolation properties of the long-term debt securities network, we identify two early-warning indicators for global financial distress. The spread of certain financial derivative products, such as credit default swaps and equity-linked derivatives, scales with the edge density of the long-term debt securities network. In addition, the algebraic connectivity of the equity securities network, taken as a measure for the robustness of financial markets, drops already sharply well ahead of the 2008 financial crisis.