CCS17 Satellite Workshop – Complex Financial Networks and Systemic Risk

Satellite aims and scope. The body of works in the area of complex financial networks has been growing impressively in the recent years both in terms of the depth of the research questions addressed and the scope of the policy applications, ranging from financial stability to climate-finance. This satellite workshop aims to gather the community of Complexity Science scholars working in this fields. [Picture credit: D’Errico ea. 2017: How does risk flow in the CDS market?]

 

Organizers: Stefano Battiston (University of Zurich), Serafín Martínez Jaramillo (Banco de Mexico)

 

Date and venue: September 20th, Cancun International Convention Center, Room 6

 

Program

09:00 – 10:00 Keynote session. Guido Caldarelli (IMT Lucca): Pathways towards instability in financial networks
10:00 – 10:30 Mauro Napoletano (OFCE): Endogenous money in a dynamic network formation model with VaR constraints
10:30 – 11:00 Coffee Break
11:00 – 13:00 Giulio Cimini (IMT Lucca): Maximum entropy reconstruction of financial networks

Alexander Becker (Boston Univ.): Network based systemic risk model for assessing contagion in financial systems

Sebastian Poledna (Complexity Science Hub Vienna, IIASA, Med Uni Vienna): Economic Forecasting with an Agent-based Model

13:00 – 14:30 Lunch break
14:30-16:00 Tarik Roukny (MIT MediaLab): A Macroprudential View on Compression

Stefano Battiston (Univ. of Zurich): Rethinking financial contagion

Serafín Martínez Jaramillo (Banco de Mexico): On Relations in the Unsecured and Secured Overnight Interbank Lending Markets

16:00 – 16:30 Coffee Break
16:30 – 17:30 Keynote session. Stefan Thurner (Med Uni Vienna): Systemic risk management by restructuring financial networks
17:30 – 18:30 Panel discussion: Policy implications to financial stability

 

Abstracts (in alphabetical order of speakers) 

 

Stefano Battiston (Univ. of Zurich): Rethinking financial contagion (joint work with G. Visentin, M. D’Errico)

How, and to what extent, does an interconnected financial system endogenously amplify external shocks? This paper attempts to reconcile some apparently different views emerged after the 2008 crisis regarding the nature and the relevance of contagion in financial networks. We develop a common framework encompassing several network contagion models and show that, regardless of the shock distribution and the network topology, precise ordering relationships on the level of aggregate systemic losses hold among models. We argue that the extent of contagion crucially depends on the amount of information that each model assumes to be available to agents. Empirically, we compare the magnitude of contagion across models on a sample of the largest European banks during the years 2006-2016. In particular, we analyse contagion effects as a function of the size of the shock and the type of external assets shocked.

 

Alexander Becker (Boston Univ.): Network based systemic risk model for assessing contagion in financial systems (joint work with I. Vodenska, H. Aoyama, Y. Fujiwara, H. Iyetomi, E. Lungu)

In this paper we study the European bank network and its vulnerability to stressing different bank assets as well as sudden drops in equity levels. The importance of macro-prudential policy is emphasized by the inherent vulnerability of the financial system, high level of leverage, interconnectivity of system’s entities, similar risk exposure of financial institutions, and potential for systemic crisis propagation through the system. Our findings suggest that to better manage systemic risk regulators need sophisticated tools for real time monitoring and systemic stress-testing of the financial system.

 

Guido Caldarelli (IMT Lucca): Pathways towards instability in financial networks (joint work with M. Bardoscia, S. Battiston, F. Caccioli)

Following the financial crisis of 2007–2008, a deep analogy between the origins of instability in financial systems and complex ecosystems has been pointed out: in both cases, topological features of network structures influence how easily distress can spread within the system. However, in financial network models, the details of how financial institutions interact typically play a decisive role, and a general understanding of precisely how network topology creates instability remains lacking. Here we show how processes that are widely believed to stabilize the financial system, that is, market integration and diversification, can actually drive it towards instability, as they contribute to create cyclical structures which tend to amplify financial distress, thereby undermining systemic stability and making large crises more likely. This result holds irrespective of the details of how institutions interact, showing that policy-relevant analysis of the factors affecting financial stability can be carried out while abstracting away from such details.

 

 Giulio Cimini (IMT Lucca): Maximum entropy reconstruction of financial networks.

We address a fundamental problem that is systematically encountered when modeling real-world complex systems of societal relevance: the limitedness of the information available. In the case of economic and financial networks, privacy issues severely limit the information that can be accessed and, as a consequence, the possibility of correctly estimating the resilience of these systems to events such as financial shocks, crises and cascade failures. Here we present an innovative method to reconstruct the structure of such partially-accessible systems, based on the knowledge of intrinsic node-specific properties and of the number of connections of only a limited subset of nodes.

 

Serafín Martínez Jaramillo (Banco de Mexico): On Relations in the Unsecured and Secured Overnight Interbank Lending Markets

In this paper we investigate if banks in the unsecured loan and the repo market in Mexico establish trading relationships with each other, that is, a preferential relationship with some specific banks, through which a significant share of interbank borrowing and lending takes place. We also study if such borrowing and lending relationships are important in the presence of external shocks.

 

Mauro Napoletano (OFCE): Endogenous money in a dynamic network formation model with VaR constraints (joint work with F. Vanni, A. Roventini, G. Dosi, P. Barucca)

In the present work a model is proposed in terms of network formation and evolution over time where the agents are leveraged institutions in the financial system made up of inter-bank connections. With heterogeneous types of units, we have fluctuations in terms of created links with a phase transition for various proportions of agents’ types. The target of the model is to observe and describe emergent structures that characterize the entire system in terms of critical pattern formation and resilience to perturbations.

 

Sebastian Poledna (Complexity Science Hub Vienna, IIASA, Med Uni Vienna): Economic Forecasting with an Agent-based Model

In this paper we develop the first ABM that depicts an actual economy based on detailed data sources from national accounts, input-output tables, government statistics, census data and business surveys, and show that this model is able to improve on vector autoregressive (VAR) and autoregressive moving average (ARMA) models in out-of-sample prediction.

 

Tarik Roukny (MIT MediaLab): A Macroprudential View on Compression (joint work with M. D’Errico)

In this paper, we show both theoretically and empirically that the size of over-the-counter (OTC) markets can be reduced without affecting individual net positions. First, we find that the networked nature of these markets generates an excess of notional obligations between the aggregate gross amount and the minimum amount required to satisfy each individual net position. Second, we show conditions under which such excess can be removed. We refer to this netting operation as compression. Third, we apply our framework to a unique and comprehensive transaction-level dataset on OTC derivatives including all firms based in the European Union.

 

Stefan Thurner (Med Uni Vienna): Systemic risk management by restructuring financial networks

We discuss the range of possibilities that open with the detailed knowledge of temporal financial multi-layer networks. We demonstrate that it is not only possible to assign systemic risk to institutions but to individual transactions in financial markets. This opens a range of strategies that allow one to restructure networks in ways that systemic risk can practically be eliminated. One of these strategies is a systemic risk tax SRT, that taxes systemically risky transactions. We demonstrate the viability of these ideas both by a massive agent based simulation approach and  a mathematical existence proof, that guarantees the existence of a systemic risk-free equilibrium under the SRT.

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Link to the Conference in Complex Systems CCS2017 – Cancun: click here.