financial network analytics @ prmia webinar
DESCRIPTION
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 (www.fna.fi) - an online platform for Financial Network Analytics.TRANSCRIPT
“When the crisis came, the serious limitations of existing economic and financial models immediately became apparent. [...] As a policy-maker during the crisis, I found the available models of limited help. In fact, I would go further: in the face of the crisis, we felt abandoned by conventional tools.”
in a Speech by Jean-Claude Trichet, President of the European Central Bank, Frankfurt, 18 November 2010
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2003 20042003
“... need for new and fundamental understanding of the structure and dynamics of economic networks.”
“Meltdown modeling -Could agent-based computer models prevent another financial crisis?”
“Is network theory the best hope for regulating systemic risk?”
CFA Magazine, July 2009 Nature, August 2009 Science, July 2009
NETWORK THEORY
Financial Network Analysis
Biological Network Analysis
Graph & Matrix Theory
Social Network Analysis
Network Science
Computer Science
Network theory and related fields
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
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/toother important nodes are more central
Hundreds of research papers later…
….www.fna.fi/library
What is a/the financial network?
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.
Country exposures networks
• Claims of banking sector by country
Asset correlation networks
• Cross-asset correlation tree ofGerman DAX index stocks
• Assets are linked in a backbone correlation network
• Clusters of asset classes clearly visible
• Data reduction method
Why are networks so topical?
Katsushika Hokusai. The great wave off Kanagawa ~1830
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
Eratosthenes' map of the known world c. 194 BC
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 in China 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
Financial Network Analytics
Financial Network Analytics (FNA)
FNA is an analytics platform that helps banks and financial regulators manage and understand financial data with network analysis
• 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
Financial Network Analytics Platform
Develop Monitor
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
Chord Force-directed
Banking sector exposures by country
25Dashboard
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Spanning Tree ofGerman DAX index stock correlationsJanuary 2012
27www.fna.fi
for more information
• http://trunk.fna.fi/fna/data/canemtest/charts/public/canem.html