Correlation of Financial Stress Indicators in a National Trade Network

A central premise behind the various bail-out efforts of the financial crisis of 2008-2009 is that the failure of individual firms, however justified, has a negative net-effect on the wider economy. If unchecked, a critical number of such failures can then lead to long term economic stagnation. To study the validity of this premise and to understand the resilience of a connected economy to the failure of individual firms we numerically analyse the agreement in financial stress between firms that trade with each other. In collaboration with one of Italy's biggest groups of banks we estimate the volume of trade between 50,000 Italian firms from a database of wire transfers, and describe the firms in this network by a set of financial stress indicators from the Centrale dei Bilanci. We find that the average stress level of a firm's trade partners is one of the best predictors of the financial stress of a firm in different linear models. By using a number of different methods we find that the correlation coefficient between the stress level of a firm and the weighted average of that of its trade partners lies between 0.1 and 0.2 for different stress indicators, and that the relationship is close to linear. We conclude that the financial health of its trade partners is an excellent indicator of the financial health of a firm. If this relationship is indeed causal, these results can be used to quantify the wider economic value of a bail-out program.

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