Network Instability as a Signal of Systemic Financial Stress: An Explainable Machine-Learning Framework

This paper develops a framework for monitoring and forecasting episodes of systemic financial stress using a combination of market information, macro-financial indicators, and measures derived from time-varying correlation networks, embedded in a sequential machine-learning setting. The contribution is not tied to a single modelling innovation, but rather to the way these ingredients are brought together under an evaluation protocol designed to mimic real-time supervisory use, and to an interpretability layer that makes the resulting predictions easier to inspect. Monthly data covering the period from 2006 to 2025 are used to construct evolving correlation structures and summary indicators of market co-movement. These features are combined with standard predictors and fed into logistic regression, random forest, and gradient boosting models, all estimated in expanding windows and assessed strictly on future observations. Predictive accuracy remains limited, which is consistent with the difficulty of anticipating stress regimes several months ahead at monthly frequency, although gradient boosting attains the highest average AUC across evaluation folds and displays noticeable variation over time. Inspection of SHAP values points to instability in correlation networks, volatility conditions, and short-horizon return behaviour as recurring drivers of the predicted stress probabilities, suggesting that the models draw on information that goes beyond individual market series. Taken together, the results indicate that recurrent statistical regularities and changes in market structure can be exploited for monitoring purposes when models are trained and tested in a sequential fashion. The overall design is intended to be usable in practice and to support supervisory analysis, while remaining transparent enough to allow scrutiny of the signals driving the forecasts.

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Publication Details

Journal
Future Internet
Published
2026-02-09
DOI
https://doi.org/10.3390/fi18020091
Primary Topic
Financial Markets and Investment Strategies
Type
article
Field-Weighted Citation Impact
0.00
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article

Network Instability as a Signal of Systemic Financial Stress: An Explainable Machine-Learning Framework

Enrico Barbierato, Alice Gatti, Livia Valentina Moretti
Future Internet
Financial Markets and Investment Strategies
article

Network Instability as a Signal of Systemic Financial Stress: An Explainable Machine-Learning Framework

Enrico Barbierato, Alice Gatti, Livia Valentina Moretti
article en

Abstract

This paper develops a framework for monitoring and forecasting episodes of systemic financial stress using a combination of market information, macro-financial indicators, and measures derived from time-varying correlation networks, embedded in a sequential machine-learning setting. The contribution is not tied to a single modelling innovation, but rather to the way these ingredients are brought together under an evaluation protocol designed to mimic real-time supervisory use, and to an interpretability layer that makes the resulting predictions easier to inspect. Monthly data covering the period from 2006 to 2025 are used to construct evolving correlation structures and summary indicators of market co-movement. These features are combined with standard predictors and fed into logistic regression, random forest, and gradient boosting models, all estimated in expanding windows and assessed strictly on future observations. Predictive accuracy remains limited, which is consistent with the difficulty of anticipating stress regimes several months ahead at monthly frequency, although gradient boosting attains the highest average AUC across evaluation folds and displays noticeable variation over time. Inspection of SHAP values points to instability in correlation networks, volatility conditions, and short-horizon return behaviour as recurring drivers of the predicted stress probabilities, suggesting that the models draw on information that goes beyond individual market series. Taken together, the results indicate that recurrent statistical regularities and changes in market structure can be exploited for monitoring purposes when models are trained and tested in a sequential fashion. The overall design is intended to be usable in practice and to support supervisory analysis, while remaining transparent enough to allow scrutiny of the signals driving the forecasts.

Future InternetVol. 18(2)
Università Cattolica del Sacro Cuore (IT)
Industry, innovation and infrastructure
Openalex Percentile: Top 65%
Financial Markets and Investment Strategies
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