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Stochastic flow diagrams

Author

Listed:
  • Calkin, Neil J.

    (Department of Mathematical Sciences, Clemson University)

  • López de Prado, Marcos

    (Guggenheim Partners)

Abstract

We introduce Stochastic Flow Diagrams (SFDs), a new mathematical approach to represent complex dynamic systems into a single weighted digraph. This topological representation provides a way to visualize what otherwise would be a morass of equations in differences. SFDs model the propagation and reverberation that follows a shock. For example, reverberation explains how a shock to a financial system can initiate a sequence of events that lead to a crash long after the occurrence of the shock. SFDs can simulate systems in stable, steady or explosive state. SFDs add Topology to the Statistical and Econometric toolkit. We believe that SFDs will help policy makers, investors and researchers communicate and discuss better the complexity of dynamic systems.

Suggested Citation

  • Calkin, Neil J. & López de Prado, Marcos, 2014. "Stochastic flow diagrams," Algorithmic Finance, IOS Press, vol. 3(1-2), pages 21-42.
    • Handle: RePEc:ris:iosalg:0008
    as

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    Citations

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    Cited by:

    1. Bruno Scalzo Dees & Ljubisa Stankovic & Anthony G. Constantinides & Danilo P. Mandic, 2019. "Portfolio Cuts: A Graph-Theoretic Framework to Diversification," Papers 1910.05561, arXiv.org, revised Oct 2019.
    2. Alvaro Arroyo & Bruno Scalzo & Ljubisa Stankovic & Danilo P. Mandic, 2021. "Dynamic Portfolio Cuts: A Spectral Approach to Graph-Theoretic Diversification," Papers 2106.03417, arXiv.org.

    More about this item

    Keywords

    Time series; graph theory; topology; financial flows; macro trading;
    All these keywords.

    JEL classification:

    • C00 - Mathematical and Quantitative Methods - - General - - - General
    • C01 - Mathematical and Quantitative Methods - - General - - - Econometrics
    • C02 - Mathematical and Quantitative Methods - - General - - - Mathematical Economics

    Statistics

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