Financial Network Analytics @ PRMIA webinar


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The recent financial crisis has brought to light the interconnected nature of modern financial systems. Academia, regulators and the industry have recently developed a stronger awareness of the need for new analytical methods and tools that can help to better monitor and safeguard the financial system and better manage systemic risks.

In the presentation we will discuss new research in financial network analysis. How can network analysis of large-scale financial transaction data be used to gain a better understanding of the financial system. How can exploratory visual analytics of time-series networks bring new insights? How can cross-asset networks enable a better intuition of market dynamics? The topics will be analyzed and visualized with FNA ( - an online platform for Financial Network Analytics.

Published in: Economy & Finance, Technology
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  • 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 @ PRMIA webinar

    1. 1. PRMIA Webinar1 February 2012Financial Network AnalyticsKimmo Soramäki |
    2. 2. “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
    3. 3. 2003 2003 2004 3
    4. 4. “Is network theory the “Meltdown modeling - “... need for new andbest hope for regulating Could agent-based fundamentalsystemic risk?” computer models prevent understanding of the another financial crisis?” structure and dynamics of economic networks.”CFA Magazine, July 2009 Nature, August 2009 Science, July 2009
    5. 5. Network theory and related fields Financial Network Analysis Social Network Network Analysis Science NETWORK THEORY Graph & Matrix Computer Theory Science Biological Network Analysis
    6. 6. 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 – Network of interconnected balance sheets – Network of asset dependencies
    7. 7. Systemic importance = “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
    8. 8. Hundreds of research papers later… ….
    9. 9. What is a/the financial network?
    10. 10. Interbank payment networks • Total of ~8000 banks • 66 banks comprise 75% of value • 25 banks completely connected Soramäki, Bech, Beyeler, Glass and Arnold (2006), Physica A, Vol. 379, pp 317-333.
    11. 11. Country exposures networks • Claims of banking sector by country
    12. 12. Asset 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
    13. 13. Why are networks so topical?
    14. 14. Katsushika Hokusai. The great wave offKanagawa ~1830
    15. 15. Data tsunami• Digital information is doubling every 1.2 years -> 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
    16. 16. Eratosthenes map of the known worldc. 194 BC
    17. 17. 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.
    18. 18. Go is a board game that originated inChina more than 2,000 years ago.
    19. 19. 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
    20. 20. Financial Network Analytics
    21. 21. Financial Network Analytics (FNA)FNA is an analytics platform that helps banks and financialregulators manage and understand financial data with networkanalysis• Web Service ( and Enterprise Software• Modular design, current modules for: – Financial Stability – Payment System Oversight – Macroprudential Supervision and – Cross Asset Analysis• Designed for operationalizing latest research
    22. 22. Financial Network Analytics Platform Develop Monitor
    23. 23. 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 = asset, Link = coupling via correlations – Dynamic Force-Directed layout of spanning tree• Dashboards
    24. 24. Banking sector exposures by country Chord Force-24 directed
    25. 25. 25 Dashboard
    26. 26. Spanning Tree ofGerman DAX index stock correlationsJanuary 201226
    27. 27. www.fna.fi27 for more information
    28. 28. • rts/public/canem.html