William Ross Ashby (1956) in ‘Introduction to Cybernetics’The use of information technology in augmenting human intelligence and extending the information processing capabilities of the human mind Visual analytics is an adjacent field
Financial Network Analytics @ Liverpool University
Liverpool UniversityResearch Cluster “ProbabilityTheory, Financial and ActuarialMathematics8 February 2012Financial Network AnalyticsKimmo Soramäki | email@example.com
“When the crisis came, the serious limitations of existing economicand financial models immediately became apparent.[...]As a policy-maker during the crisis, I found the available models oflimited help. In fact, I would go further: in the face of the crisis, wefelt abandoned by conventional tools.” in a Speech by Jean-Claude Trichet, President of the European Central Bank, Frankfurt, 18 November 2010
Network theory and related fields Financial Network Analysis Social Network Network Analysis Science NETWORK THEORY Graph & Matrix Computer Theory Science Biological Network Analysis
Katsushika Hokusai. The great wave offKanagawa ~1830
Data tsunami• Digital information is doubling every 1.2 years -> Big Data, Open Data, Data Science, ‘Chief Algorithms Officers’…• Regulatory response to recent financial crisis was to strengthen macro-prudential supervision with mandates for more regulatory data• The challenge will be to understand and analyze the data• Analytics based decision-making, i.e. the application of computer technology, operational research, and statistics to support decision making Katsushika Hokusai. The great wave off Kanagawa ~1830
Network maps• Natural way to visualize the financial system• Network visualizations are intuitive• Maps aid decision making• Mapping of the financial system has only begun Eratosthenes map of the known world, c. 194 BC.
Go is a board game that originated inChina more than 2,000 years ago.
Intelligence Amplification • Technology, products and practices change constantly • Data is not clean, actions are not ‘rational’ • Algorithms don’t fare well in periods of abrupt change • Algorithms do not think outside the box • A solution is to augment human intelligence • Intelligence Amplification vs Artificial Intelligence
Main premise of network analysis:Structure of links between nodes matters• The properties and behavior of a node cannot be analyzed on the basis its own properties and behavior alone.• To understand the behavior of one node, one must analyze the behavior of nodes that may be several links apart in the network.• Bottom up approach. Generalize and describe.• Financial contexts – Trading networks, payment networks – Networks of interconnected balance sheets – Networks of asset dependencies
Central theme: Centrality• Degree: number of links• Closeness: distance to other nodes via shortest paths• Betweenness: number of shortest paths going through the node• Eigenvector: nodes that are linked by/to other important nodes are more central
Centrality depends onnetwork processTrajectory geodesic paths, paths, trails or walksTransmission parallel/serial duplication or transfer Source: Borgatti (2004) 15
Topology of interactions Degree distribution Total of ~8000 banks 66 banks comprise 75% of value Soramäki, Bech, Beyeler, Glass and Arnold 25 banks completely connected (2006), Physica A, Vol. 379, pp 317-333.
The New York Times, 1 May 2010Europes Web of Debt
BBC, 18 November 2011Eurozone debt web: Who owes what to whom? ( ) http://www.bbc.co.uk/news/business-15748696
Country exposures networks • Claims of banking sector by country
Stock correlation networks • Cross-asset correlation tree of German DAX index stocks • Assets are linked in a backbone correlation network • Clusters of asset classes clearly visible • Data reduction method
Financial Network Analytics (FNA)FNA is an analytics platform that helps banks and financialregulators manage and understand financial data with networkanalysis• Web Service (www.fna.fi) and Enterprise Software• Modular design, current modules for: – Financial Stability – Payment System Oversight – Macroprudential Supervision and – Cross Asset Analysis• Designed for operationalizing latest research
Demos• Bilateral banking sector exposures by country (2005- 2011) – Node = country, Link = banking system exposure – Force-Directed layout of network• Asset correlation data for DAX stocks (January 2012) – Node = stock, Link = coupling via correlations – Dynamic Force-Directed layout of spanning tree• Dashboards