Dynamic spectral co-clustering of directed networks to unveil latent community paths in VAR-type models

Abstract: Identifying network Granger causality in large vector autoregressive (VAR) models enhances explanatory power by capturing complex interdependencies among variables. Instead of constructing network structures solely through sparse estimation of coefficients, we explore latent community structures to uncover the underlying network dynamics. We propose a dynamic network framework that embeds directed connectivity within the transition matrices of VAR-type models, enabling tracking of evolving community structures over time. To incorporate network directionality, we employ degree-corrected stochastic co-block models for each season or cycle, integrating spectral co-clustering with singular vector smoothing to refine latent community transitions. For greater model parsimony, we adopt periodic VAR (PVAR) and vector heterogeneous autoregressive (VHAR) models as alternatives to high-lag VAR models. We provide theoretical justifications for the proposed methodology and demonstrate its effectiveness through applications to the cyclic evolution of US nonfarm payroll employment and the temporal progression of realized stock market volatilities. Indeed, spectral co-clustering of directed networks reveals dynamic latent community trajectories, offering deeper insights into the evolving structure of high-dimensional time series.