A maximum entropy network reconstruction of macroeconomic models

The choice of free parameters in network models is subjective, since it depends on what topological properties are being monitored. However, we show that the Maximum Likelihood (ML) principle indicates a unique, statistically rigorous parameter choice, associated to a well defined topological feature. We then find that, if the ML condition is incompatible with the built-in parameter choice, network models turn out to be intrinsically ill-defined or biased. To overcome this pr...

The global financial system can be represented as a large complex network in which banks, hedge funds and other financial institutions are interconnected to each other through visible and invisible financial linkages. Recently, a lot of attention has been paid to the understanding of the mechanisms that can lead to a breakdown of this network. This can happen when the existing financial links turn from being a means of risk diversification to channels for the propagation of r...

In recent decades, trade between nations has constituted an important component of global Gross Domestic Product (GDP), with official estimates showing that it likely accounted for a quarter of total global production. While evidence of association already exists in macro-economic data between trade volume and GDP growth, there is considerably less work on whether, at the level of individual granular sectors (such as vehicles or minerals), associations exist between the compl...

This is a review article for Encyclopedia of Complexity and System Science, to be published by Springer http://refworks.springer.com/complexity/. The paper reviews statistical models for money, wealth, and income distributions developed in the econophysics literature since late 1990s.

Production networks constitute the backbone of every economic system. They are inherently fragile as several recent crises clearly highlighted. Estimating the system-wide consequences of local disruptions (systemic risk) requires detailed information on the supply chain networks (SCN) at the firm-level, as systemic risk is associated with specific mesoscopic patterns. However, such information is usually not available and realistic estimates must be inferred from available se...

Economic interdependencies have become increasingly present in globalized production, financial and trade systems. While establishing interdependencies among economic agents is crucial for the production of complex products, they may also increase systemic risks due to failure propagation. It is crucial to identify how network connectivity impacts both the emergent production and risk of collapse of economic systems. In this paper we propose a model to study the effects of ne...

Scale invariance, collective behaviours and structural reorganization are crucial for portfolio management (portfolio composition, hedging, alternative definition of risk, etc.). This lack of any characteristic scale and such elaborated behaviours find their origin in the theory of complex systems. There are several mechanisms which generate scale invariance but maximum entropy models are able to explain both scale invariance and collective behaviours. The study of the struct...

We study the international interbank market through a geometrical and a topological analysis of empirical data. The geometrical analysis of the time series of cross-country liabilities shows that the systematic information of the interbank international market is contained in a space of small dimension, from which a topological characterization could be conveniently carried out. Weighted and complete networks of financial linkages across countries are developed, for which con...

Networks of financial exposures are the key propagators of risk and distress among banks, but their empirical structure is not publicly available because of confidentiality. This limitation has triggered the development of methods of network reconstruction from partial, aggregate information. Unfortunately, even the best methods available fail in replicating the number of directed cycles, which on the other hand play a crucial role in determining graph spectra and hence the d...

The global financial crisis in 2007-2009 demonstrated that systemic risk can spread all over the world through a complex web of financial linkages, yet we still lack fundamental knowledge about the evolution of the financial web. In particular, interbank credit networks shape the core of the financial system, in which a time-varying interconnected risk emerges from a massive number of temporal transactions between banks. The current lack of understanding of the mechanics of i...