Enhancing financial stability through prospective resilience: Insights from the EN-VAR-DY-PR framework in international stock market networks

The increasing interconnectedness and systemic vulnerabilities of financial networks underscore the necessity of enhancing their resilience to shocks and ensuring the stability of the global financial system. This paper proposes the EN-VAR-DY-PR framework, which integrates Elastic Net (EN) regularization, Vector Autoregression (VAR), and the Diebold–Yilmaz (DY) index. This novel approach enables the dynamic assessment of prospective resilience (PR) in complex financial networks, capturing both temporal and structural dimensions of risk. Focusing on three scenarios – economic blockade, financial liberalization, and random behavior – this research examines the dynamic evolution of network prospective resilience across three distinct periods marked by major market crises. Empirical analysis of 40 countries reveals that while economic blockade temporarily enhances network resilience, it undermines long-term shock absorption. Conversely, financial liberalization consistently improves network stability, and an optimal level of randomness significantly improve the resilience of financial networks and strengthen overall financial stability. Additionally, over the three periods, the clustering of the network decreases and the network becomes more homogeneous, suggesting heightened risk concentration and intensified interconnectedness. The significant growth in both the prospective resilience and volatility of network modularity underscores an escalating systemic vulnerability and a weakening of overall network stability. This study provides a novel perspective on financial stability, demonstrating how network science can effectively identify systemic vulnerabilities and inform strategies to mitigate systemic risks. • A novel EN-VAR-DY-PR framework is proposed. • Economic blockade (removal of nodes) temporarily enhances network resilience but undermines long-term shock absorption. • Financial liberalization (addition of nodes) consistently strengthens network stability. • An optimal level of random behavior improves resilience and supports overall financial stability.