Contagious synchronization and endogenous network formation in financial networks

When banks choose similar investment strategies the financial system becomes vulnerable to common shocks. We model a simple financial system in which banks decide about their investment strategy based on a private belief about the state of the world and a social belief formed from observing the actions of peers. Observing a larger group of peers conveys more information and thus leads to a stronger social belief. Extending the standard model of Bayesian updating in social networks, we show that the probability that banks synchronize their investment strategy on a state non-matching action critically depends on the weighting between private and social belief. This effect is alleviated when banks choose their peers endogenously in a network formation process, internalizing the externalities arising from social learning.     

Digital currencies in financial networks

We introduce a central bank digital currency (CBDC) in the network of financial accounts. Simulating a shift of deposits by both households and non-financial corporations from the banking sector to the central bank, we model the different responses of the affected institutional sectors. We find that the introduction of CBDC generates funding shortages in banks, which may propagate to other sectors. In addition, significant adjustments in the balance sheets of all sectors trigger large moves in securities prices and induce changes in the financial network structure. Finally, we extend the analysis to the introduction of a crypto financial asset (stablecoin) issued by either a domestic or a foreign entity.     

Dynamics of international financial networks with risk management

In this paper, we develop an international financialnetwork model in which the sources of funds and the intermediaries are multicriteria decision-makers and are concerned with both net revenue maximization and risk minimization. The model allows for both physical as well as electronic transactions and considers three tiers of decision-makers who may be located in distinct countries and may conduct their transactions in different currencies. We describe the behaviour of the various decision-makers, along with their optimality conditions, and derive the variational inequality formulation of the governing equilibrium conditions. We then propose a dynamic adjustment process which yields the evolution of the financial flows and prices and demonstrate that it can be formulated as a projected dynamical system. We also provide qualitative properties including stability analysis results. Finally, we discuss a discrete-time algorithm which can be applied to track the dynamic trajectories and yields the equilibrium financial flows and prices. We illustrate both the modelling framework as well as the computational procedure with several numerical international financial network examples.     

Resilience to the financial crisis in customer-supplier networks

Inspired by the Capital Asset Pricing Model (CAPM) beta, we construct customer and supplier betas to separately investigate potentially different properties of downstream and upstream linkages. With the adjacency matrix acting as a ‘filter’ to extract each company's return covariances with its trading partners, the cross-sectional dependence contained in the customer-supplier network is summarized by our betas. We explore how these two betas are related to a company's resilience to the financial crisis of 2008–2009. We observe that a higher customer beta is generally associated with more resilience during the crisis. Therefore, investors could construct the customer beta to gain insights into the relative negative impact of a potential crisis on a stock's performance.     

How likely is contagion in financial networks?

Interconnections among financial institutions create potential channels for contagion and amplification of shocks to the financial system. We estimate the extent to which interconnections increase expected losses and defaults under a wide range of shock distributions. In contrast to most work on financial networks, we assume only minimal information about network structure and rely instead on information about the individual institutions that are the nodes of the network. The key node-level quantities are asset size, leverage, and a financial connectivity measure given by the fraction of a financial institution’s liabilities held by other financial institutions. We combine these measures to derive explicit bounds on the potential magnitude of network effects on contagion and loss amplification. Spillover effects are most significant when node sizes are heterogeneous and the originating node is highly leveraged and has high financial connectivity. Our results also highlight the importance of mechanisms that go beyond simple spillover effects to magnify shocks; these include bankruptcy costs, and mark-to-market losses resulting from credit quality deterioration or a loss of confidence. We illustrate the results with data on the European banking system.     

Feedforward neural networks in the classification of financial information

Financial research has given rise to numerous studies in which, on the basis of the information provided by financial statements, companies are classified into different groups. An example is that of the classification of companies into those that are solvent and those that are insolvent. Linear discriminant analysis (LDA) and logistic regression have been the most commonly used statistical models in this type of work. One feedforward neural network, known as the multilayer perceptron (MLP), performs the same task as LDA and logistic regression which, a priori, makes it appropriate for the treatment of financial information. In this paper, a practical case based on data from Spanish companies, shows, in an empirical form, the strengths and weaknesses of feedforward neural networks. The desirability of carrying out an exploratory data analysis of the financial ratios in order to study their statistical properties, with the aim of achieving an appropriate model selection, is made clear.     

金融网际互联发展现状与管理探析

为了能够支撑混业经营、联合监管、跨国经营环境下的实时、方便、快捷的金融服务和金融动态监管，实现本系统、跨系统、跨行业的系统互联、互通和互操作，实现金融业务直通式综合处理，中国银行业“十一五”信息化建设发展规划确定建设一个高效、安全、开放、稳健和可扩展的金融基础设施平台，主要内容包括：建设金融网际互联平台，方便金融机构间数据交换，系统互联和业务互操作；研制符合我国金融特点的公共应用软件，     

Multilayer financial networks and systemic importance: Evidence from China

In this paper, we develop a multilayer network structure and reveal the relationship between network structure and systemic risk. Unlike many previous studies, our model considers both liability and cross-holding of shares between financial institutions simultaneously. We propose a new systemic risk measurement by exploring the dynamic mechanism of financial contagion in the multilayer network. We display the network structure of Chinese financial institutions, including connectivity and diversity, and identify the systemic importance of them. We demonstrate that the multilayer network plays a non-linear role in financial risk spreading. Using the panel regression model and several experiment evidences, we show that the systemic risk can be explained more effectively by the linkage diversity more than the connectivity at both the institutional level and the system level. Our results highlight the importance of considering contagion mechanisms that go beyond a simple single-layer network structure.     

The new new financial thing: The origins of financial innovations

The origins of financial innovations have attracted little empirical scrutiny. Using Wall Street Journal articles as an indicator, this paper examines which institutions were the key financial innovators between 1990 and 2002. The evidence suggests that smaller firms account for a disproportionate share of the innovations. Less profitable firms innovate more, though in the years subsequent to the introduction of the innovation, the profitability of the innovators increases significantly. Finally, older, less leveraged firms located in regions with more financial innovations innovate more. While several of the determinants of patenting are similar, small and unprofitable firms do not patent disproportionately.     

Shock amplification in financial networks with applications to the CCP feasibility

We find central clearing counterparty amplified shocks are due to financial institutions     

The value of financial flexibility and corporate financial policy

We propose a novel approach to measure the value that shareholders assign to financial flexibility. In contrast to existing proxies for financial constraints, our measure is market-based, forward-looking and not directly influenced by past financial decisions. We find that firms for which shareholders consider financial flexibility more valuable have lower dividend payouts, prefer share repurchases to dividends, and exhibit lower leverage ratios. Moreover, these firms tend to accumulate more cash. Our analysis contributes to the growing literature on financial flexibility and indicates that—in line with prior survey evidence—financial flexibility considerations shape corporate financial policy.     

The financial Logos: The framing of financial decision-making by mathematical modelling

This paper introduces the notion of “financial Logos”, defined as a structuring discourse embedded in management tools and beliefs of financial practices. I hypothesize that this discourse contains a specific representation of risk mathematically modelled by probability measures. Next I use a performativity based approach to describe the concrete action of the financial Logos on financial practices: the framing of financial decision-making by mathematical modelling. I argue that it is not possible to think of a given financial practice without epistemologically and sociologically thinking of the contribution of the mathematical modelling to this practice. I conclude with consequences for ethics of finance: extending ethics of action to epistemic ethics, I suggest that, in finance, any preference in mathematical modelling is also a preference in ethics.     

The risk of financial intermediaries

This paper reconsiders the formal estimation of bank risk using the variability of the profit function. In our model, point estimates of the variability of profits are derived from a model where this variability is endogenous to other bank characteristics, such as capital and liquidity. We estimate the new model on the entire panel of US banks, spanning the period 1985q1–2012q4. The findings show that bank risk was fairly stable up to 2001 and accelerated quickly thereafter up to 2007. We also establish that the risk of the relatively large banks and banks that failed in the subprime crisis is higher than the industry’s average. Thus, we provide a new leading indicator, which is able to forecast future solvency problems of banks.     

论金融理论的创新

把金融看成是与货币流通相关的经济活动有它的合理性；把货币流通和信用活动包含在金融定义之内，强调金融是货币资金融通，有其合理性和局限性，把金融定义为“资本市场的运营、资本资产的供给与定价”是由融资活动的发展变化推进的；从方法论的角度说有从横向考察金融和从纵向考察金融；新近出版的博迪、莫顿合著的《金融学》在什么是金融、为会么要研究金融及怎样研究金融等方面都有创新。     

金融创新应该做些什么?

中国工商银行董事长姜建清讲述了一个故事:2006年早些时候,我曾经与日本软银集团的的孙正义谈起中国互联网经营,说工商银行今后4年内将把50%的业务移转到网上银行,10年内可能达到70%.孙正义讲,那时候工商银行将是世界上最大的互联网企业.听了他的讲话,我确实有些震动,世界上最大的银行之一能和世界上最大的互联网企业之一划等号吗?但是我又想,为什么不能呢?姜建清认为:     

The theory of financial intermediation

Traditional theories of intermediation are based on transaction costs and asymmetric information. They are designed to account for institutions which take deposits or issue insurance policies and channel funds to firms. However, in recent decades there have been significant changes. Although transaction costs and asymmetric information have declined, intermediation has increased. New markets for financial futures and options are mainly markets for intermediaries rather than individuals or firms. These changes are difficult to reconcile with the traditional theories. We discuss the role of intermediation in this new context stressing risk trading and participation costs.     

The resolution of financial distress

Most models of financial structure embody an assumption aboutfinancial distress that causes debt to be costly to the issuingfirm. This approach has been criticized on the grounds thatthe assumed costs could be avoided by a costless financial reorganization.In this article we show that despite the possibility of costlessreorganization, it may be rational for firms to incur significantcosts in the resolution of financial distress. The main assumptionsthat give rise to our results are the existence of asymmetricinformation and of judicial discretion that allows courts toimpose a reorganization on the claimants of a firm.     

The future of financial fraud

Is financial fraud becoming a bigger or smaller problem over time? Current empirical approaches to this question generate mixed inferences. As an alternative, I use two theoretical constructs that isolate several factors that motivate fraud, and use them to consider the impact of technological and wealth changes over time. Some changes, such as an increase in anonymity in some financial transactions, facilitate new fraud innovations and increase the possibility of fraud. The COVID-19 pandemic and resulting economic shutdown has fostered major disruptions in relative demands and organizational capital that also increase the likelihood of fraud over the next few years. Viewed over a longer time scale, however, the majority of technological and wealth changes seem likely to increase the use and effectiveness of reputational capital, third-party enforcement, and ethical motivations as fraud deterrents. I predict that, on net, these changes will drive a long-term decrease in the incidence of fraud.     

The evolution of financial constraints

We demonstrate that the severity of financial constraints has declined over time for two reasons: (i) improved access to external funds as evidenced by a decreased reliance on internal cash flows, and (ii) an inward shifting investment frontier with reduced investment opportunities. The decline in financial constraints coincides with the documented diminishing sensitivity of investment to cash flows, yet we show that cash flows remain a determining factor in helping constrained firms overcome restricted access to external capital. There is a flight-to-quality during economic shocks, where the adverse effects following periods of tightened credit are particularly pronounced for smaller firms, with larger firms appearing largely unaffected.