Xinyao Zhao | Searcharxiv

arXiv2025

A General CoVaR Based on Entropy Pooling

We propose a general CoVaR framework that extends the traditional CoVaR by incorporating diverse expert views and information, such as asset moment characteristics, quantile insights, and perspectives on the relative loss distribution between two assets. To integrate these expert views effectively while minimizing deviations from the prior distribution, we employ the entropy pooling method to derive the posterior distribution, which in turn enables us to compute the general CoVaR. Assuming bivariate normal distributions, we derive its analytical expressions under various perspectives. Sensitivity analysis reveals that CoVaR exhibits a linear relationship with both the expectations of the variables in the views and the differences in expectations between them. In contrast, CoVaR shows nonlinear dependencies with respect to the variance, quantiles, and correlation within these views. Empirical analysis of the US banking system during the Federal Reserve's interest rate hikes demonstrates the effectiveness of the general CoVaR when expert views are appropriately specified. Furthermore, we extend this framework to a general $\Delta$CoVaR, which allows for the assessment of risk spillover effects from various perspectives.

stat.ME↗

arXiv2023

How does node centrality in a financial network affect asset price prediction?

In complex financial networks, systemically important nodes usually play crucial roles. Asset price forecasting is important for describing the evolution of a financial network. Naturally, the question arises as to whether node centrality impacts the effectiveness of price forecasting. To explore this, we examine networks composed of major global assets and investigate how node centrality affects price forecasting using a hybrid random forest algorithm. Our findings reveal two counterintuitive phenomena: (i) factors with low centrality usually have better forecasting ability, and (ii) nodes with low centrality can be predicted more accurately in direction. These unexpected observations can be explained from the perspective of information theory. Moreover, our research suggests a criterion for factor selection: when predicting an asset price in a complex system, factors with low centrality should be selected rather than only factors with high centrality. Finally, we verify the robustness of our results using an alternative deep learning method.

physics.soc-ph↗