IDEAS home Printed from https://ideas.repec.org/a/spr/minsoc/v14y2015i2p155-167.html

Network science: a useful tool in economics and finance

Author

Listed:
  • Dror Kenett

  • Shlomo Havlin

Abstract

The increasing frequency and scope of financial crises has made global financial stability one of the major concerns of economic policy and decision makers. Under this highly complex environment, supervision of the financial system has to be thought of as a systemic task, focusing not only on the strength of the institutions but also on the interdependent relations among them, unraveling the structure and dynamic of the system as a whole. In recent years, network science has emerged as a leading tool for the investigation of complex systems. Here we review several applications of network science in finance and economics, and discuss existing challenges and future directions which will substantiate network science as a key tool for financial academics, practitioners, and policy and decision makers. Copyright Springer-Verlag Berlin Heidelberg 2015

Suggested Citation

  • Dror Kenett & Shlomo Havlin, 2015. "Network science: a useful tool in economics and finance," Mind & Society: Cognitive Studies in Economics and Social Sciences, Springer;Fondazione Rosselli, vol. 14(2), pages 155-167, November.
    • Handle: RePEc:spr:minsoc:v:14:y:2015:i:2:p:155-167
    DOI: 10.1007/s11299-015-0167-y
    as

    Download full text from publisher

    File URL: http://hdl.handle.net/10.1007/s11299-015-0167-y
    Download Restriction: Access to full text is restricted to subscribers.
    File URL: https://libkey.io/10.1007/s11299-015-0167-y?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to

    for a different version of it.

    References listed on IDEAS

    as
    1. Onnela, J.-P. & Chakraborti, A. & Kaski, K. & Kertész, J., 2003. "Dynamic asset trees and Black Monday," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 324(1), pages 247-252.
    2. Hajime Inaoka & Takuto Ninomiya & Ken Taniguchi & Tokiko Shimizu & Hideki Takayasu, 2004. "Fractal Network derived from banking transaction -- An analysis of network structures formed by financial institutions --," Bank of Japan Working Paper Series 04-E-4, Bank of Japan.
    3. Dror Y Kenett & Matthias Raddant & Thomas Lux & Eshel Ben-Jacob, 2012. "Evolvement of Uniformity and Volatility in the Stressed Global Financial Village," PLOS ONE, Public Library of Science, vol. 7(2), pages 1-8, February.
    4. Xuqing Huang & Irena Vodenska & Shlomo Havlin & H. Eugene Stanley, 2012. "Cascading Failures in Bi-partite Graphs: Model for Systemic Risk Propagation," Papers 1210.4973, arXiv.org, revised Jan 2013.
    5. Richard Bookstaber & Paul Glasserman & Garud Iyengar & Yu Luo & Venkat Venkatasubramanian & Zhizun Zhang, 2015. "Process Systems Engineering as a Modeling Paradigm for Analyzing Systemic Risk in Financial Networks," Working Papers 15-01, Office of Financial Research, US Department of the Treasury.
    6. M. Tumminello & T. Di Matteo & T. Aste & R. N. Mantegna, 2007. "Correlation based networks of equity returns sampled at different time horizons," The European Physical Journal B: Condensed Matter and Complex Systems, Springer;EDP Sciences, vol. 55(2), pages 209-217, January.
    7. R. Mantegna, 1999. "Hierarchical structure in financial markets," The European Physical Journal B: Condensed Matter and Complex Systems, Springer;EDP Sciences, vol. 11(1), pages 193-197, September.
    8. Guo-Hua Mu & Wei-Xing Zhou & Wei Chen & Janos Kertesz, 2010. "Order flow dynamics around extreme price changes on an emerging stock market," Papers 1003.0168, arXiv.org.
    9. Hamed Amini & Rama Cont & Andreea Minca, 2012. "Stress Testing The Resilience Of Financial Networks," World Scientific Book Chapters, in: Matheus R Grasselli & Lane P Hughston (ed.), Finance at Fields, chapter 2, pages 17-36, World Scientific Publishing Co. Pte. Ltd..
    10. Glasserman, Paul & Young, H. Peyton, 2015. "How likely is contagion in financial networks?," Journal of Banking & Finance, Elsevier, vol. 50(C), pages 383-399.
    11. Solomon, Sorin & Weisbuch, Gerard & de Arcangelis, Lucilla & Jan, Naeem & Stauffer, Dietrich, 2000. "Social percolation models," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 277(1), pages 239-247.
    12. Tesfatsion, Leigh & Judd, Kenneth L., 2006. "Handbook of Computational Economics, Vol. 2: Agent-Based Computational Economics," Staff General Research Papers Archive 10368, Iowa State University, Department of Economics.
    13. Helmut Elsinger & Alfred Lehar & Martin Summer, 2006. "Risk Assessment for Banking Systems," Management Science, INFORMS, vol. 52(9), pages 1301-1314, September.
    14. LeBaron, Blake, 2006. "Agent-based Computational Finance," Handbook of Computational Economics, in: Leigh Tesfatsion & Kenneth L. Judd (ed.), Handbook of Computational Economics, edition 1, volume 2, chapter 24, pages 1187-1233, Elsevier.
    15. Soramäki, Kimmo & Bech, Morten L. & Arnold, Jeffrey & Glass, Robert J. & Beyeler, Walter E., 2007. "The topology of interbank payment flows," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 379(1), pages 317-333.
    16. Dirk Helbing, 2013. "Globally networked risks and how to respond," Nature, Nature, vol. 497(7447), pages 51-59, May.
    17. Amir Bashan & Ronny P. Bartsch & Jan. W. Kantelhardt & Shlomo Havlin & Plamen Ch. Ivanov, 2012. "Network physiology reveals relations between network topology and physiological function," Nature Communications, Nature, vol. 3(1), pages 1-9, January.
    18. Billio, Monica & Getmansky, Mila & Lo, Andrew W. & Pelizzon, Loriana, 2012. "Econometric measures of connectedness and systemic risk in the finance and insurance sectors," Journal of Financial Economics, Elsevier, vol. 104(3), pages 535-559.
    19. Sergey V. Buldyrev & Roni Parshani & Gerald Paul & H. Eugene Stanley & Shlomo Havlin, 2010. "Catastrophic cascade of failures in interdependent networks," Nature, Nature, vol. 464(7291), pages 1025-1028, April.
    20. Helmut Elsinger & Alfred Lehar & Martin Summer, 2006. "Using Market Information for Banking System Risk Assessment," International Journal of Central Banking, International Journal of Central Banking, vol. 2(1), March.
    21. Andrew G. Haldane & Robert M. May, 2011. "Systemic risk in banking ecosystems," Nature, Nature, vol. 469(7330), pages 351-355, January.
    22. Paul Glasserman & Peyton Young, 2015. "Contagion in Financial Networks," Economics Series Working Papers 764, University of Oxford, Department of Economics.
    23. A. Garas & P. Argyrakis & S. Havlin, 2008. "The structural role of weak and strong links in a financial market network," The European Physical Journal B: Condensed Matter and Complex Systems, Springer;EDP Sciences, vol. 63(2), pages 265-271, May.
    24. Wei Li & Dror Y. Kenett & Kazuko Yamasaki & H. Eugene Stanley & Shlomo Havlin, 2014. "Ranking the Economic Importance of Countries and Industries," Papers 1408.0443, arXiv.org.
    25. Leigh Tesfatsion & Kenneth L. Judd (ed.), 2006. "Handbook of Computational Economics," Handbook of Computational Economics, Elsevier, edition 1, volume 2, number 2.
    26. Craig, Ben & von Peter, Goetz, 2014. "Interbank tiering and money center banks," Journal of Financial Intermediation, Elsevier, vol. 23(3), pages 322-347.
    27. Nier, Erlend & Yang, Jing & Yorulmazer, Tanju & Alentorn, Amadeo, 2007. "Network models and financial stability," Journal of Economic Dynamics and Control, Elsevier, vol. 31(6), pages 2033-2060, June.
    28. Upper, Christian & Worms, Andreas, 2004. "Estimating bilateral exposures in the German interbank market: Is there a danger of contagion?," European Economic Review, Elsevier, vol. 48(4), pages 827-849, August.
    29. Fricke, Daniel & Lux, Thomas, 2012. "Core-periphery structure in the overnight money market: Evidence from the e-MID trading platform," Kiel Working Papers 1759, Kiel Institute for the World Economy.
    30. Antonios Garas & Panos Argyrakis & Shlomo Havlin, 2008. "The structural role of weak and strong links in a financial market network," Papers 0805.2477, arXiv.org.
    31. Rama Cont & Amal Moussa & Edson B Santos, 2013. "Network structure and systemic risk in banking systems," Post-Print hal-00912018, HAL.
    32. L. Bargigli & G. di Iasio & L. Infante & F. Lillo & F. Pierobon, 2015. "The multiplex structure of interbank networks," Quantitative Finance, Taylor & Francis Journals, vol. 15(4), pages 673-691, April.
    33. Caldarelli, Guido, 2007. "Scale-Free Networks: Complex Webs in Nature and Technology," OUP Catalogue, Oxford University Press, number 9780199211517.
    34. Hamed Amini & Rama Cont & Andreea Minca, 2012. "Stress Testing The Resilience Of Financial Networks," International Journal of Theoretical and Applied Finance (IJTAF), World Scientific Publishing Co. Pte. Ltd., vol. 15(01), pages 1-20.
    35. Chaoming Song & Shlomo Havlin & Hernán A. Makse, 2005. "Self-similarity of complex networks," Nature, Nature, vol. 433(7024), pages 392-395, January.
    36. Tesfatsion, Leigh, 2002. "Agent-Based Computational Economics: Growing Economies from the Bottom Up," ISU General Staff Papers 200201010800001251, Iowa State University, Department of Economics.
    37. Furfine, Craig H, 2003. "Interbank Exposures: Quantifying the Risk of Contagion," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 35(1), pages 111-128, February.
    38. Dror Y Kenett & Yoash Shapira & Asaf Madi & Sharron Bransburg-Zabary & Gitit Gur-Gershgoren & Eshel Ben-Jacob, 2011. "Index Cohesive Force Analysis Reveals That the US Market Became Prone to Systemic Collapses Since 2002," PLOS ONE, Public Library of Science, vol. 6(4), pages 1-8, April.
    39. Andrea Aguiar & Rick Bookstaber & Thomas Wipf, 2014. "A Map of Funding Durability and Risk," Working Papers 14-03, Office of Financial Research, US Department of the Treasury.
    40. Hamed Amini & Rama Cont & Andreea Minca, 2012. "Stress testing the resilience of financial networks," Post-Print hal-00801538, HAL.
    41. Galbiati, Marco & Soramäki, Kimmo, 2012. "Clearing networks," Journal of Economic Behavior & Organization, Elsevier, vol. 83(3), pages 609-626.
    42. Dror Y Kenett & Michele Tumminello & Asaf Madi & Gitit Gur-Gershgoren & Rosario N Mantegna & Eshel Ben-Jacob, 2010. "Dominating Clasp of the Financial Sector Revealed by Partial Correlation Analysis of the Stock Market," PLOS ONE, Public Library of Science, vol. 5(12), pages 1-14, December.
    43. Tumminello, Michele & Lillo, Fabrizio & Mantegna, Rosario N., 2010. "Correlation, hierarchies, and networks in financial markets," Journal of Economic Behavior & Organization, Elsevier, vol. 75(1), pages 40-58, July.
    44. Chester Curme & Michele Tumminello & Rosario N. Mantegna & H. Eugene Stanley & Dror Y. Kenett, 2015. "Emergence of statistically validated financial intraday lead-lag relationships," Quantitative Finance, Taylor & Francis Journals, vol. 15(8), pages 1375-1386, August.
    45. Michael Boss & Helmut Elsinger & Martin Summer & Stefan Thurner, 2004. "Network topology of the interbank market," Quantitative Finance, Taylor & Francis Journals, vol. 4(6), pages 677-684.
    46. repec:bla:jfinan:v:53:y:1998:i:4:p:1245-1284 is not listed on IDEAS
    47. Langfield, Sam & Liu, Zijun & Ota, Tomohiro, 2014. "Mapping the UK interbank system," Journal of Banking & Finance, Elsevier, vol. 45(C), pages 288-303.
    48. Drehmann, Mathias & Tarashev, Nikola, 2013. "Measuring the systemic importance of interconnected banks," Journal of Financial Intermediation, Elsevier, vol. 22(4), pages 586-607.
    49. Richard Bookstaber & Mark Paddrik & Brian Tivnan, 2018. "An agent-based model for financial vulnerability," Journal of Economic Interaction and Coordination, Springer;Society for Economic Science with Heterogeneous Interacting Agents, vol. 13(2), pages 433-466, July.
    50. Iori, Giulia & De Masi, Giulia & Precup, Ovidiu Vasile & Gabbi, Giampaolo & Caldarelli, Guido, 2008. "A network analysis of the Italian overnight money market," Journal of Economic Dynamics and Control, Elsevier, vol. 32(1), pages 259-278, January.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Levy-Carciente, Sary & Kenett, Dror Y. & Avakian, Adam & Stanley, H. Eugene & Havlin, Shlomo, 2015. "Dynamical macroprudential stress testing using network theory," Journal of Banking & Finance, Elsevier, vol. 59(C), pages 164-181.
    2. Dror Y. Kenett & Sary Levy-Carciente & Adam Avakian & H. Eugene Stanley & Shlomo Havlin, 2015. "Dynamical Macroprudential Stress Testing Using Network Theory," Working Papers 15-12, Office of Financial Research, US Department of the Treasury.
    3. Marco Bardoscia & Paolo Barucca & Stefano Battiston & Fabio Caccioli & Giulio Cimini & Diego Garlaschelli & Fabio Saracco & Tiziano Squartini & Guido Caldarelli, 2021. "The Physics of Financial Networks," Papers 2103.05623, arXiv.org.
    4. Fabio Caccioli & Paolo Barucca & Teruyoshi Kobayashi, 2018. "Network models of financial systemic risk: a review," Journal of Computational Social Science, Springer, vol. 1(1), pages 81-114, January.
    5. Andre R. Neveu, 2018. "A survey of network-based analysis and systemic risk measurement," Journal of Economic Interaction and Coordination, Springer;Society for Economic Science with Heterogeneous Interacting Agents, vol. 13(2), pages 241-281, July.
    6. Sadamori Kojaku & Giulio Cimini & Guido Caldarelli & Naoki Masuda, 2018. "Structural changes in the interbank market across the financial crisis from multiple core-periphery analysis," Papers 1802.05139, arXiv.org.
    7. Pablo Rovira Kaltwasser & Alessandro Spelta, 2019. "Identifying systemically important financial institutions: a network approach," Computational Management Science, Springer, vol. 16(1), pages 155-185, February.
    8. Paul Glasserman & H. Peyton Young, 2015. "Contagion in Financial Networks," Working Papers 15-21, Office of Financial Research, US Department of the Treasury.
    9. Paul Glasserman & Peyton Young, 2015. "Contagion in Financial Networks," Economics Series Working Papers 764, University of Oxford, Department of Economics.
    10. Irena Vodenska & Alexander P. Becker & Di Zhou & Dror Y. Kenett & H. Eugene Stanley & Shlomo Havlin, 2016. "Community Analysis of Global Financial Markets," Risks, MDPI, vol. 4(2), pages 1-15, May.
    11. Teteryatnikova, Mariya, 2014. "Systemic risk in banking networks: Advantages of “tiered” banking systems," Journal of Economic Dynamics and Control, Elsevier, vol. 47(C), pages 186-210.
    12. Hüser, Anne-Caroline, 2016. "Too interconnected to fail: A survey of the Interbank Networks literature," SAFE Working Paper Series 91, Leibniz Institute for Financial Research SAFE, revised 2016.
    13. Liu, Anqi & Paddrik, Mark & Yang, Steve Y. & Zhang, Xingjia, 2020. "Interbank contagion: An agent-based model approach to endogenously formed networks," Journal of Banking & Finance, Elsevier, vol. 112(C).
    14. Tiziano Squartini & Guido Caldarelli & Giulio Cimini & Andrea Gabrielli & Diego Garlaschelli, 2018. "Reconstruction methods for networks: the case of economic and financial systems," Papers 1806.06941, arXiv.org.
    15. Ebrahimi Kahou, Mahdi & Lehar, Alfred, 2017. "Macroprudential policy: A review," Journal of Financial Stability, Elsevier, vol. 29(C), pages 92-105.
    16. Giulio Cimini & Matteo Serri, 2016. "Entangling Credit and Funding Shocks in Interbank Markets," PLOS ONE, Public Library of Science, vol. 11(8), pages 1-15, August.
    17. Leonidas Sandoval Junior, 2012. "To lag or not to lag? How to compare indices of stock markets that operate at different times," Papers 1201.4586, arXiv.org, revised Jul 2013.
    18. Silva, Walmir & Kimura, Herbert & Sobreiro, Vinicius Amorim, 2017. "An analysis of the literature on systemic financial risk: A survey," Journal of Financial Stability, Elsevier, vol. 28(C), pages 91-114.
    19. Arreola Hernandez, Jose & Kang, Sang Hoon & Shahzad, Syed Jawad Hussain & Yoon, Seong-Min, 2020. "Spillovers and diversification potential of bank equity returns from developed and emerging America," The North American Journal of Economics and Finance, Elsevier, vol. 54(C).
    20. Batiz-Zuk, Enrique & López-Gallo, Fabrizio & Martínez-Jaramillo, Serafín & Solórzano-Margain, Juan Pablo, 2016. "Calibrating limits for large interbank exposures from a system-wide perspective," Journal of Financial Stability, Elsevier, vol. 27(C), pages 198-216.

    More about this item

    Keywords

    ;
    ;
    ;
    ;
    ;
    ;

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:spr:minsoc:v:14:y:2015:i:2:p:155-167. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Sonal Shukla or Springer Nature Abstracting and Indexing (email available below). General contact details of provider: http://www.springer.com .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.