Network dynamics and systemic risks

Advanced Systems Analysis (ASA) Program researchers develop dynamic network models of ecological, economic, and social systems; in particular, financial systemic risk and cascading failures in the inter-bank lending network are studied.

© Gajus | Dreamstime

© Gajus | Dreamstime

Contemporary global systems are increasingly intra- and inter-dependent. Actions and interactions of individual actors, even if small, can catalyze significant cascading effects, leaving the whole system susceptible to profound systemic risk. ASA develops approaches to modeling network dynamics and to assessing and managing systemic risk in ecological, economic, and social systems.

In previous work, ASA researchers introduced the notion of the systemic risk increment (marginal systemic risk) of an individual financial transaction, that is, its contribution to the overall systemic risk. Knowing the marginal systemic risk of individual transactions opens the way to a completely new approach for managing financial systemic risk by re-shaping the topology of financial networks. By evaluating contributions to systemic risk from four layers of the national banking system of Mexico ASA researchers have shown that focusing on a single layer significantly underestimates the total systemic risk [1]. Using similar methods, another ASA study analyzed global multi-layer trade network of minerals and evaluated the composite indicator of the systemic riskiness of countries and regions based on their network properties and dependence on imports [2].

Finally, ASA research has also been used to study the economic and financial ramifications of crisis resolution mechanisms [3]. The authors of this study used an agent-based model, finding that for an economy characterized by low unemployment and high productivity, the optimal crisis resolution with respect to financial stability and economic productivity is to close the distressed institution. For economies in recession with high unemployment the bail-in tool provides the most efficient crisis resolution mechanism. Under no circumstances do taxpayer-funded bail-out schemes outperform bail-ins with private sector involvement.

References

[1] Poledna S, Molina-Borboa JL, Martinez-Jaramillo S, van der Leij M & Thurner S (2015). The multi-layer network nature of systemic risk and its implications for the costs of financial crises. Journal of Financial Stability 20:70-81.

[2] Klimek P, Obersteiner M & Thurner S (2015a). Systemic trade risk of critical resources. Science Advances 1(10):e1500522.

[3] Klimek P, Poledna S, Farmer JD &Thurner S (2015b). To bail-out or to bail-in? Answers from an agent-based model. Journal of Economic Dynamics and Control 50:144-154.

Collaborators

Section for Science of Complex Systems, Medical University of Vienna, Austria

Institute for New Economic Thinking at the Oxford Martin School, University of Oxford, UK

Mathematical Institute, University of Oxford, UK

Dirección General de Estabilidad Financiera, Banco de México, Ciudad de México, Distrito Federal, Mexico

CeNDEF, University of Amsterdam, The Netherlands

Research Department, De Nederlandsche Bank, The Netherlands

Tinbergen Institute, Amsterdam, The Netherlands


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Last edited: 15 March 2016

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Stefan Thurner

Senior Research Scholar

Ecosystems Services and Management

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International Institute for Applied Systems Analysis (IIASA)
Schlossplatz 1, A-2361 Laxenburg, Austria
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