Financial Network Analysis Using Polymodel Theory

• DOI: 10.20944/preprints202409.1453.v2
• Publication Date: 2025-03-26T05:23:44Z
• Authors: S. Z.; Zhikang Dong; Raphael Douady

This paper presents a novel approach to financial network analysis by leveraging PolyModel theory. Traditional financial networks often rely on correlation matrices to represent relationships between assets, but these fail to capture the complex, non-linear interactions prevalent in financial markets. In response, we propose a method that quantifies the relationship between financial time series by comparing their reactions to a broad set of environmental risk factors. This method constructs a network based on the inherent similarities in how assets respond to external risks, offering a more robust representation of financial markets. We introduce several network topological properties, such as eigenvalues, degree, and clustering coefficients, to measure market stability and detect financial instabilities. These metrics are applied to a real-world dataset, including the DOW 30, to predict market drawdowns. Our results indicate that this PolyModel-based network framework is effective in capturing downside risks and can predict significant market drawdowns with high accuracy. Furthermore, we enhance sensitivity to smaller market changes by introducing new time-series indicators, which further improve the predictive power of the model.