Presentation at PRMIA Global Risk Conference, New York, 15 May 2012

1. Concurrent Session 1B:
Mapping Financial Landscapes
Speaker
Kimmo Soramäki

2. “When the crisis came, the serious limitations of existing economic
and financial models immediately became apparent.
[...]
As a policy-maker during the crisis, I found the available models of
limited help. In fact, I would go further: in the face of the crisis, we
felt abandoned by conventional tools.”
in a Speech by Jean-Claude Trichet, President of the
European Central Bank, Frankfurt, 18 November 2010
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3. We did not have maps …
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4. Eratosthenes' map of the known world4
c. 194 BC

5. Fedwire payment network
• Total of ~8000 banks
• 66 banks comprise 75% of
value
• 25 banks completely connected
• Scale-free degree distribution
• Similar to other socio-
technological networks
Soramäki, Bech, Beyeler, Glass and Arnold
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(2007), Physica A, Vol. 379, pp 317-333.

6. Financial and geographic maps
Similarities
• Are visualizations of multivariate data
• Have global and local views
• Alter and aid decision making
Differences - Financial Maps:
• Relationships are not spatial
• Change faster than tectonic plates
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7. Agenda
Mapping Systemic Risk
Mapping Market Data
Network Theory
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8. Mapping systemic risk
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9. Systemic risk ≠ systematic risk
News articles mentioning “systemic risk”, Source: trends.google.com
• The risk of disruption to a financial entity with spillovers to the real
economy
• Risk of a crisis that stresses key intermediation markets and leads to their
breakdown, which impacts the broader economy and requires
government intervention
• Risk that critical nodes of a financial network cease to function as
designed, disrupting linkages
-> some chain of events that starts or gets magnified in the finance sector and
makes us all worse off
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10. Background
• Regulatory response to recent financial crisis was to
strengthen macro-prudential supervision with mandates for
more regulatory data.
• The challenge now is to
understand and utilize the data
• Analytics based policy and regulation,
i.e. the application of computer
technology, operations research,
and statistics to support decision Katsushika Hokusai. The great wave off
making Kanagawa ~1830
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11. Research
• A growing body of empirical research on financial networks from a
systemic risk perspective
• Interbank payment flows
– Soramäki et al (2006), Becher et al. (2008), Boss et al. (2008), Pröpper et al. (2009),
Embree and Roberts (2009), Akram and Christophersen (2010) …
• Overnight loans networks
– Atalay and Bech (2008), Bech and Bonde (2009), Wetherilt et al. (2009), Iori et al.
(2008) and Heijmans et al. (2010), Craig & von Peter (2010) …
• Flow of funds, Credit registry, Stock trading…
– Castren and Kavonius (2009), Bastos e Santos and Cont (2010), Garrett et al. 2011,
Minoiu and Reyes (2011), Adamic et al. (2009), Jiang and Zhou (2011) …
• More at www.fna.fi/library
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12. Visualizing Financial Networks
Bech, M.L. and Atalay, E. (2008), “The Topology of
the Federal Funds Market”. ECB Working Paper No. 986. Italian money market
Iori G, G de Masi, O Precup, G Gabbi and G
Caldarelli (2008): “A network analysis of the Italian
overnight money market”, Journal of Economic
Dynamics and Control, vol. 32(1), pages 259-278
Federal funds Unsecured Sterling
money market
Wetherilt, A. P. Zimmerman, and K. Soramäki
(2008), “The sterling unsecured loan market
during 2006–2008: insights from network
topology“, in Leinonen (ed), BoF Scientific
monographs, E 42
Minoiu, Camelia and Reyes, Javier A. (2010). A network analysis of global
Cross-border bank lending banking:1978-2009. IMF Working Paper WP/11/74.
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13. The New York Times, 1 May 2010
Europe's Web of Debt
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14. BBC, 18 November 2011
Eurozone debt web: Who owes what to whom?
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http://www.bbc.co.uk/news/business-15748696

15. Example 1:
BIS consolidated banking statistics
• The Bank for International Settlements (BIS) consolidated banking
sector statistics (item
9D), http://www.bis.org/statistics/consstats.htm
• Data on banks' on-balance sheet financial claims by country
• Provide a measure of the risk exposures of lenders' national banking
systems.
• Only countries reporting both exposures from and to are included
net_id from_id to_id value
2005-1Q Australia Austria 499
2005-1Q Australia Belgium 1135
2005-1Q Australia Canada 1884
2005-1Q Australia Finland 553
2005-1Q Australia France 5028
…
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16. • ‘Chord diagram’
• Using D3
library based
on work on
Circos
• Implemented in
FNA
• Link to
interactive
version
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17. Centrality
• Degree: number of links
• Closeness: distance to other
nodes via shortest paths
• Betweenness: number of shortest
paths going through the node
• Eigenvector: nodes that are linked by/to
other important nodes are more central
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18. • Network layout
• Node size
scales with
PageRank
• Link width
scales with
value of
exposure
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19. Mapping financial markets
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20. Correlation matrix
• Pairwise correlations of 141 assets, 9927 data points
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21. • Heatmap
• Deep blue ->
strong negative
correlation
• Deep red ->
strong positive
correlation
• Link to
interactive
version
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22. • We consider
only the
Maximum
Spanning Tree
of absolute
correlations
• 140 unique
data points
-> links
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23. • Network visualization
of correlation tree
• Clear clustering of
asset classes
• Size of nodes scales
with their degree
centrality
• Joint work with
Jochen
Papenbrock, Firamis
UG (Germany)
• Link to interactive
version 23

24. • Link lengths
scale with
correlation
• Mapping
change and
time-series
• Link to
interactive
version
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25. Intelligence Amplification
• A solution is to augment human
intelligence
• Intelligence Amplification vs Artificial
Intelligence
William Ross Ashby (1956) in ‘Introduction to
Cybernetics’
• Technology, products and practices
change constantly, market knowledge Game of Go (from China).
is essential
Computer programs only get to
human amateur level due to good
• Algorithms don’t fare well in periods of pattern recognition capabilities
abrupt change, algorithms do not think needed in the game.
outside the box
• Data reduction 25

26. Network Theory is to Financial Maps what
Cartography is to Geographic Maps
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27. Network theory and related fields
Financial
Network
Analysis
Social Network Network
Analysis Science
NETWORK
THEORY
Graph & Matrix Computer
Theory Science
Biological
Network
Analysis
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28. Main premise of network theory:
Structure of links between nodes matters
• The properties and behavior of a node cannot be analyzed on the
basis its own properties and behavior alone.
• To understand the behavior of one node, one must analyze the
behavior of nodes that may be several links apart in the network.
• Financial contexts
– Trading networks, payment networks, exposure networks
– Networks of interconnected balance sheets
– Networks of asset dependencies
• Topics: Centrality, Communities, Layouts, Spreading and generation
processes, Path finding, etc.
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29. FNA.fi - Open platform for
Financial Network Analysis
www.fna.fi – Open platform for
Financial Network Analysis
Contact: kimmo@soramaki.net
Twitter: soramaki
Thank you!
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