Contingent Linear Financial Networks

In this paper, we develop a methodology to estimate hidden linear networks when only an aggregate outcome is observed. The aggregate observable variable is a linear mixture of the different networks and it is assumed that each network corresponds to the transmission mechanism of different shocks. We implement the methodology to estimate financial networks among US financial institutions. Credit Default Swap rates are the observable variable and we show that more than one network is needed to understand the dynamic behavior exhibited in the data.