Financial Network Analysis and VisualisationKimmo Soramäkiwww.financialnetworkanalysis.comNew York University, Stern Schoo...
Growinginterest in networks<br />2004<br />2003<br />2003<br />
“... need for new and fundamental understanding of the structure and dynamics of economic networks.”<br />“Meltdown modeli...
We are talking about systemic risk ≠ systematic risk<br />News articles mentioning “systemic risk”, Source: trends.google....
“Too big to fail”<br />+<br />“Too interconnected to fail”<br />
Weneedsomecartography<br />19th century reconstruction of Eratosthenes' map of the known world, c.194 BC.<br />
Ontheinterconnections<br />Paul Butler, December 14, 2010 <br />
Paymentflows in Fedwire<br />Soramaki, K, M.L. Bech, J. Arnold, R.J. Glass and W.E. Beyeler (2007), “The topology of inter...
Overnight lending networks<br />Italian money market<br />Federal funds<br />Bech, M.L. and Atalay, E. (2008), “The Topolo...
Network theory and related fields<br />Financial Network Analysis<br />Social Network Analysis<br />Network Science<br />N...
Main premise of network analysis: Structure of links between nodes matters<br /><ul><li>The properties and behaviour of a ...
To understand the behaviour of one node, one must analyse the behaviour of nodes that may be several links apart in the ne...
Bottom up approach. Generalize and describe.
Financial context: network of interconnected balance sheets
Should we let the next Lehman fail?</li></li></ul><li>Systemic importance = “centrality” <br />Degree: number of links<br ...
Centrality depends on network process <br />Trajectory: geodesic paths, paths, trails or walks<br />Transmission: parallel...
The road ahead<br />We need better models of systemic risk and contagion<br />We will have much more frequent and granular...
Open source project with a commercial support option<br />Sponsored by <br />Norges Bank<br />European Central Bank<br />B...
Objectives of FNA<br />Provide a tool for time series analysis of network data in finance<br />Integrate data analysis, vi...
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Financial Network Analysis and Visualisation - Seminar at NYU/Stern 5 April 2011

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Financial Network Analysis and Visualisation - Seminar at NYU/Stern 5 April 2011

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Financial Network Analysis and Visualisation - Seminar at NYU/Stern 5 April 2011

  1. 1. Financial Network Analysis and VisualisationKimmo Soramäkiwww.financialnetworkanalysis.comNew York University, Stern School of Business5th April 2011<br />
  2. 2. Growinginterest in networks<br />2004<br />2003<br />2003<br />
  3. 3. “... need for new and fundamental understanding of the structure and dynamics of economic networks.”<br />“Meltdown modeling -Could agent-based computer models prevent another financial crisis?”<br />“Is network theory the best hope for regulating systemic risk?”<br />Science, July 2009<br />CFA Magazine, July 2009<br />Nature, August 2009<br />
  4. 4. We are talking about systemic risk ≠ systematic risk<br />News articles mentioning “systemic risk”, Source: trends.google.com<br />The risk of disruption to a financial entity with spillovers to the real economy<br />Risk of a crisis that stresses key intermediation markets and leads to their breakdown, which impacts the broader economy and requires government intervention<br />Risk that critical nodes of a financial network cease to function as designed, disrupting linkages<br />-> some chain of events that starts or gets magnified in the finance sector and makes us all worse off<br />
  5. 5. “Too big to fail”<br />+<br />“Too interconnected to fail”<br />
  6. 6. Weneedsomecartography<br />19th century reconstruction of Eratosthenes' map of the known world, c.194 BC.<br />
  7. 7. Ontheinterconnections<br />Paul Butler, December 14, 2010 <br />
  8. 8. Paymentflows in Fedwire<br />Soramaki, K, M.L. Bech, J. Arnold, R.J. Glass and W.E. Beyeler (2007), “The topology of interbank payment flows”, Physica A, Vol. 379, pp 317-333, 2007.<br />
  9. 9. Overnight lending networks<br />Italian money market<br />Federal funds<br />Bech, M.L. and Atalay, E. (2008), “The Topology of the Federal Funds Market”. ECB Working Paper No. 986.  <br />Iori G, G de Masi, O Precup, G Gabbi and G Caldarelli (2008): “A network analysis of the Italian overnight money market”, Journal of Economic Dynamics and Control, vol. 32(1), pages 259-278 <br />
  10. 10. Network theory and related fields<br />Financial Network Analysis<br />Social Network Analysis<br />Network Science<br />NETWORK THEORY<br />Graph & Matrix Theory<br />Computer Science<br />Biological Network Analysis<br />
  11. 11. Main premise of network analysis: Structure of links between nodes matters<br /><ul><li>The properties and behaviour of a node cannot be analysed on the basis its own properties and behaviour alone.
  12. 12. To understand the behaviour of one node, one must analyse the behaviour of nodes that may be several links apart in the network.
  13. 13. Bottom up approach. Generalize and describe.
  14. 14. Financial context: network of interconnected balance sheets
  15. 15. Should we let the next Lehman fail?</li></li></ul><li>Systemic importance = “centrality” <br />Degree: number of links<br />Closeness: distance to other nodes via shortest paths<br />Betweenness: number of shortest paths going through the node<br />Eigenvector: nodes that are linked by/toother important nodes are more central<br />Markov: probability that a randomprocess is at a given node<br />
  16. 16. Centrality depends on network process <br />Trajectory: geodesic paths, paths, trails or walks<br />Transmission: parallel/serial duplication or transfer<br />Source: Borgatti (2004)<br />
  17. 17. The road ahead<br />We need better models of systemic risk and contagion<br />We will have much more frequent and granular data<br />We need better tools that can run the new models with the new data<br />
  18. 18. Open source project with a commercial support option<br />Sponsored by <br />Norges Bank<br />European Central Bank<br />Bank of England<br />Version 2.0 will be released in April. <br />
  19. 19. Objectives of FNA<br />Provide a tool for time series analysis of network data in finance<br />Integrate data analysis, visualization and exploration<br />Provide a platform for building agent based and simulation models<br />Make advances in research available to policy<br />
  20. 20. Roots<br />Bof-PSS2<br />Bank of Finland, 1997-<br />Payment system simulator<br />Used in ~60 central banks<br />Loki<br />Sandia National Laboratories , 2004-<br />Toolkit for network analysis and ABM<br />
  21. 21. The big picture<br />Transaction analysis<br />Network analysis<br />Simulation models <br />File input/output<br />File input/output<br />File input/output<br />Generate<br />Cascadingfailures<br />Operate<br />Extract<br />Edit<br />Payment simulation<br />Statistics<br />Algorithms<br />Algorithms<br />Explore<br />Systemic risk<br />Transaction database<br />Graph database<br />Interfaces: Command line,REST, GWT<br />Client applications: web, external programs, … <br />Run-time visualization<br />Visual explorer<br />Charts and network layouts<br />
  22. 22. Thank you<br />More information:<br />www.financialnetworkanalysis.com<br />Contact us: kimmo.soramaki@fna.fi<br />
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