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Reconstruction of Interbank Network using Ridge Entropy Maximization Model

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Document pages: 18 pages

Abstract: We develop a network reconstruction model based on the entropy maximizationconsidering the sparsity of network. Here the reconstruction is to estimatenetwork s adjacency matrix from node s local information. We reconstruct theinterbank network in Japan from financial data in balance sheets of individualbanks using the developed reconstruction model in the period from 2000 to 2016.The sparsity of the interbank network is successfully reproduced in thereconstructed network. We examine the accuracy of the reconstructed interbanknetwork by comparing the actual data and analyze the characteristics of theinterbank network. The comparison confirms that the accuracy of thereconstruction model is acceptably good. For the reconstructed interbanknetwork, we obtain the following characteristics which are consistent with thepreviously known stylized facts: the short path length, the small clusteringcoefficient, the disassortative property, and the core and peripheralstructure. Community analysis shows that the number of communities is 2-3 inthe normal period, 1 in the economic crisis (2003, 2008-2013). The major nodesin each community have been the major commercial banks. Since 2013, the majorcommercial banks have lost the average PageRank and the leading regional bankshave obtained both the average degree and the average PageRank. The observedchanging role of banks is considered as a result of the quantitative andqualitative easing monetary policy started by Bank of Japan in April of 2013.

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