Complex derivatives

Battiston, Stefano; Caldarelli, Guido; Georg, Co-Pierre; May, Robert M.; Stiglitz, Joseph E.

doi:10.1038/nphys2575

Cited by 44 publications

(40 citation statements)

References 5 publications

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“…Within the field of complex networks [1], the investigation of financial networks is currently one of the emerging avenues [2], [3], also in view of the on-going global financial crisis.…”

Section: Introductionmentioning

confidence: 99%

Credit Default Swaps Drawup Networks: Too Interconnected to Be Stable?

Kaushik

Battiston

2013

PLoS ONE

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We analyse time series of CDS spreads for a set of major US and European institutions in a period overlapping the recent financial crisis. We extend the existing methodology of -drawdowns to the one of joint -drawups, in order to estimate the conditional probabilities of spike-like co-movements among pairs of spreads. After correcting for randomness and finite size effects, we find that, depending on the period of time, 50% of the pairs or more exhibit high probabilities of joint drawups and the majority of spread series are trend-reinforced, i.e. drawups tend to be followed by drawups in the same series. We then carry out a network analysis by taking the probability of joint drawups as a proxy of financial dependencies among institutions. We introduce two novel centrality-like measures that offer insights on how both the systemic impact of each node as well as its vulnerability to other nodes' shocks evolve in time.

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“…Within the field of complex networks [1], the investigation of financial networks is currently one of the emerging avenues [2], [3], also in view of the on-going global financial crisis.…”

Section: Introductionmentioning

confidence: 99%

Credit Default Swaps Drawup Networks: Too Interconnected to Be Stable?

Kaushik

Battiston

2013

PLoS ONE

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“…The complexity of the financial system is a source of potential information asymmetries and collective moral hazard (16,20). Indeed, if the default of some financial institutions has an impact on the system that is possibly very large but difficult to compute exactly, those institutions are more likely to enjoy a bailout with public funds; they tend therefore to count on being rescued in case of downturn and take more risk than they would otherwise.…”

Section: Discussionmentioning

confidence: 99%

“…The default probability of one institution depends therefore on the default probability of all of the other institutions in the network. The resulting complexity of the financial system is a potential source of information asymmetries, collective moral hazard, and increased systemic risk (16)(17)(18)(19)(20) and, hence, requires deeper understanding. In particular, the determination of the probability of systemic events has remained an open problem so far (21)(22)(23)(24)(25).…”

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confidence: 99%

The price of complexity in financial networks

Battiston

Caldarelli

May

et al. 2016

Proc. Natl. Acad. Sci. U.S.A.

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166

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Financial institutions form multilayer networks by engaging in contracts with each other and by holding exposures to common assets. As a result, the default probability of one institution depends on the default probability of all of the other institutions in the network. Here, we show how small errors on the knowledge of the network of contracts can lead to large errors in the probability of systemic defaults. From the point of view of financial regulators, our findings show that the complexity of financial networks may decrease the ability to mitigate systemic risk, and thus it may increase the social cost of financial crises.financial contagion | financial networks | complexity | default probability | systemic risk

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“…In the sub-market for credit default swaps, for example, the ten most important market participants are involved in more than 70% of all transactions" (c.f. Battiston et al, 2013). The reverse side of the same coin is the infinitesimal market share of retail investors -estimated at below one percent of amounts outstanding, for example, for equity derivatives (Deutsche Börse, 2008: 6).…”

Section: Financial Markets As Concentrated Institutional Interactionmentioning

confidence: 99%