On Measuring and Evaluating Global Stability of Financial Networks

Abstract

Threats on the stability of a financial system may severely affect the functioning of the entire economy, and thus considerable emphasis is placed on the analyzing the cause and effect of such threats. The financial crisis in the current and past decade has shown that one important cause of instability in global markets is the so-called "financial contagion", namely the spreading of instabilities or failures of individual components of the network to other, perhaps healthier, components. This leads to a natural question of whether the regulatory authorities could have predicted and perhaps mitigated the current economic crisis by effective computations of some stability measure of the banking networks.

Motivated by such observations, we consider the problem of defining and evaluating stabilities of both homogeneous and heterogeneous banking networks against propagation of synchronous idiosyncratic shocks given to a subset of banks. We formalize the homogeneous banking network model of Nier et al. and its corresponding heterogeneous version, formalize the synchronous shock propagation procedures, define two appropriate stability measures and investigate the computational complexities of evaluating these measures for various network topologies and parameters of interest. Our results and proofs also shed some light on the properties of topologies and parameters of the network that may lead to higher or lower stabilities. Time permitting, we will also discuss our comprehensive empirical evaluation of this stability measure over more than 700,000 combinations of networks types and parameter combinations that leads to discovering many interesting implications of our evaluations on the stability measures, and deriving topological properties and parameters combinations that may be used to flag the network as a possible fragile network.

Biography

Bhaskar DasGupta is currently an associate professor in the Computer Science Department at University of Illinois at Chicago. His specific research interests include designing and implementing efficient computational methods for computationally hard problems in application areas such as bioinformatics, systems biology and hybrid systems. Outside biology, his broader research interests in computer science include designing efficient algorithms for computationally hard problems in diverse areas such as computational geometry, parallel computing, optical networks and combinatorial auctions. DasGupta is a senior member of IEEE and has published about 100 research papers. His research works have been supported by numerous NSF grants, including an NSF CAREER award. DasGupta currently serves on the editorial boards of the journals IEEE Transactions on Neural Networks, Advances in Bioinformatics, Theoretical Biology Insights, International Journal of Data Mining and Bioinformatics, International Journal of Information Sciences, and Computer Engineering and Discrete Mathematics, Algorithms and Applications.