Systemic risk analysis in reconstructed economic and financial networks

Propagation of balance-sheet or cash-flow insolvency across financial institutions may be modeled as a cascade process on a network representing their mutual exposures. We derive rigorous asymptotic results for the magnitude of contagion in a large financial network and give an analytical expression for the asymptotic fraction of defaults, in terms of network characteristics. Our results extend previous studies on contagion in random graphs to inhomogeneous directed graphs wi...

Most empirical studies of networks assume that the network data we are given represent a complete and accurate picture of the nodes and edges in the system of interest, but in real-world situations this is rarely the case. More often the data only specify the network structure imperfectly -- like data in essentially every other area of empirical science, network data are prone to measurement error and noise. At the same time, the data may be richer than simple network measure...

In the last 15 years, statistical physics has been a very successful framework to model complex networks. On the theoretical side, this approach has brought novel insights into a variety of physical phenomena, such as self-organisation, scale invariance, emergence of mixed distributions and ensemble non-equivalence, that display unconventional features on heterogeneous networks. At the same time, thanks to their deep connection with information theory, statistical physics and...

In this paper, we introduce a novel centrality measure to evaluate shock propagation on financial networks capturing a notion of contagion and systemic risk contributions. In comparison to many popular centrality metrics (e.g., eigenvector centrality) which provide only a relative centrality between nodes, our proposed measure is in an absolute scale permitting comparisons of contagion risk over time. In addition, we provide a statistical validation method when the network is...

This paper introduces a novel framework to study default dependence and systemic risk in a financial network that evolves over time. We analyse several indicators of risk, and develop a new latent space model to assess the health of key European banks before, during, and after the recent financial crises. First, we adopt the measure of CoRisk to determine the impact of such crises on the financial network. Then, we use minimum spanning trees to analyse the correlation structu...

Predicting missing links in real networks is an important problem in network science to which considerable efforts have been devoted, giving as a result a vast plethora of link prediction methods in the literature. In this work, we take a different point of view on the problem and study the theoretical limitations to the predictability of missing links. In particular, we hypothesise that there is an irreducible uncertainty in link prediction on real networks as a consequence ...

In this article the problem of reconstructing the pattern of connection between agents from partial empirical data in a macro-economic model is addressed, given a set of behavioral equations. This systemic point of view puts the focus on distributional and network effects, rather than time-dependence. Using the theory of complex networks we compare several models to reconstruct both the topology and the flows of money of the different types of monetary transactions, while imp...

The ability to share social network data at the level of individual connections is beneficial to science: not only for reproducing results, but also for researchers who may wish to use it for purposes not foreseen by the data releaser. Sharing such data, however, can lead to serious privacy issues, because individuals could be re-identified, not only based on possible nodes' attributes, but also from the structure of the network around them. The risk associated with re-identi...

We discuss the systemic risk implied by the interbank exposures reconstructed with the maximum entropy method. The maximum entropy method severely underestimates the risk of interbank contagion by assuming a fully connected network, while in reality the structure of the interbank network is sparsely connected. Here, we formulate an algorithm for sparse network reconstruction, and we show numerically that it provides a more reliable estimation of the systemic risk.

In an increasingly connected world, the resilience of networked dynamical systems is important in the fields of ecology, economics, critical infrastructures, and organizational behaviour. Whilst we understand small-scale resilience well, our understanding of large-scale networked resilience is limited. Recent research in predicting the effective network-level resilience pattern has advanced our understanding of the coupling relationship between topology and dynamics. However,...