Systemic Risk In The Financial System: Insights From Network Science
This paper provides an additional perspective for understanding the financial crisis. Unlike most papers which focus on describing the poor behavior of financial participants this paper focuses on understanding “the interconnections” between firms. As we all know, interconnectedness is one of the reasons our financial system is so fragile…
Introduction (Via PEWFR)
This paper looks at systemic risk from the perspective of network structure, and the connectivity links between actors in the financial system. It notes that network structure may have played a role in the financial crisis in three important ways: that financial markets may have lacked robustness; that the pattern of network links may have made the system subject to contagion; and that a lack of diversity in networks may have impaired their resilience, or ability to adapt.
Hammond notes that comprehensive efforts to understand systemic risk and undertake reform of the financial system should focus not only on financial actors themselves, but also on the ways in which they are connected. The structure of financial networks shapes the systems’ dynamics in important ways, and understanding this structure can provide insights into how to prevent future crises.