Network Theory and Financial Risk
Discipline: Operational Risk, Corporate Risk
No of pages: 228
The financial crisis of 2007-2009 demonstrated the dangers of ignoring connections in complex systems for economics and finance: Lehman Brothers and AIG weren’t the biggest players in terms of size, but were very highly connected in the markets and their failures led to shocks across the financial system which are still being felt today.
As a result, applications of network theory are becoming ever more present in finance, with network analysis providing answers to questions where traditional analysis methods are weak; and also leading to improved models across wide types of risks. In fact, networks underlie virtually every type of risk, including liquidity, operational, insurance, and credit risk. However, while network approaches are very useful, understanding complex networks is not easy.
Network Theory and Financial Risk is a hands-on guide to analysing and modelling financial networks. Authors Kimmo Soramaki and Samantha Cook provide an in-depth introduction to network theory and examine general tools for network analysis, detailing coverage of four types of widely-occurring financial networks: payment systems, exposure networks, trade networks, and asset correlation networks.