Title: A dynamic network model with persistent links and node-specific latent variables, with an application to the interbank market,
Abstract: We propose a dynamic network model where two mechanisms control the
probability of a link between two nodes: (i) the existence or absence of this
link in the past, and (ii) node-specific latent variables (dynamic fitnesses)
describing the propensity of each node to create links. Assuming a Markov
dynamics for both mechanisms, we propose an Expectation-Maximization algorithm
for model estimation and inference of the latent variables. The estimated
parameters and fitnesses can be used to forecast the presence of a link in the
future. We apply our methodology to the e-MID interbank network for which the
two linkage mechanisms are associated with two different trading behaviors in
the process of network formation, namely preferential trading and trading
driven by node-specific characteristics. The empirical results allow to
recognise preferential lending in the interbank market and indicate how a
method that does not account for time-varying network topologies tends to
overestimate preferential linkage.