Economics  (E) Session 5

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Time and Date: 10:45 - 12:45 on 22nd Sep 2016

Room: A - Administratiezaal

Chair: Sumit Sourabh

231 Pathways towards instability in financial networks [abstract]
Abstract: Following the financial crisis of 2007-2008, a deep analogy between the origins of instability in financial systems and in complex ecosystems has been pointed out - in both cases, topological features of network structures influence how easy it is for distress to spread within the system. However, in financial network models, the intricate details of how financial institutions interact typically play a decisive role. Hence, a general understanding of precisely how network topology creates instability remains lacking. Here we show how processes that are widely believed to stabilise the financial system, i.e. market integration and diversification, can actually drive it towards instability, as they contribute to create cyclical structures which tend to amplify financial distress, thereby undermining systemic stability and making large crises more likely. This result holds irrespective of the precise details of how institutions interact, and demonstrates that policy-relevant analysis of the factors affecting financial stability can be carried out while abstracting away from such details. Close
Marco Bardoscia, Stefano Battiston, Fabio Caccioli and Guido Caldarelli
67 The role of networks in firms’ multi-characteristics competition and market-share inequality [abstract]
Abstract: We develop a location analysis spatial model of firms’ competition in multi-characteristics space, where consumers’ opinions about the firms’ products are distributed on multilayered networks. Firms do not compete on price but only on location upon the products’ multi-characteristics space, and they aim to attract the maximum number of consumers. Boundedly rational consumers have distinct ideal points/tastes over the possible available firm locations but, crucially, they are affected by the opinions of their neighbors. Our central argument is that the consolidation of a dense underlying consumers’ opinion network is the key for the firm to enlarge its market-share. Proposing a dynamic agent-based analysis on firms’ location choice we characterize multi-dimensional product differentiation competition as adaptive learning by firms’ managers and we argue that such a complex systems approach advances the analysis in alternative ways, beyond game-theoretic calculations. Close
Athanasios Lapatinas and Antonios Garas
569 Concentration and systemic risk in banking networks [abstract]
Abstract: Since the 2007–2009 financial crisis, mounting evidence suggests that failures of large banks represent a major risk for the resilience of banking networks. This finding is widely used to link the increasing concentration of financial markets with an increase in their fragility. However, the same argument can easily result in the mistaken idea that any market change associated with an increase in concentration also amplifies systemic risk. In this study we applied stress tests to both hypothetical and empirically calibrated banking networks to observe how various bank-size distributions affect systemic risk. We found that analogous to the resilience of ecosystems, no single property of banking networks could explain the probability of systemic failure. We quantified concentration in terms of the Herfindahl–Hirschman index and also identified an additional indicator, inequality, measured by Rao’s quadratic entropy, which is important for understanding the concentration–resilience relationship. We found, counterintuitively, that an increase in concentration was beneficial when it was not followed by an increase in inequality. Similarly, a decrease in concentration became harmful when it was not followed by a decrease in inequality. Mergers of large banks increased, whereas mergers of small banks decreased systemic risk. Splitting of large banks was also effective in reducing systemic risk if splitting was not overdone to the extent that it resulted in too many small banks. Our results provide a guideline that can be applied to frequent issues that regulators face, such as bank mergers. Close
Stojan Davidovic, Amit Kothiyal, Konstantinos Katsikopoulos and Mirta Galesic
92 The asymptotic dynamics of wealth inequality and income-wealth interactions [abstract]
Abstract: The rapid increase of wealth inequality in the past few decades is one of the most disturbing social and economic issues of our time. Studying its origin and underlying mechanisms is essential for policy aiming to control and even reverse this trend. In this talk, I will describe a novel theoretical approach using interacting multi-agent master-equations from which the dynamics of the wealth inequality emerge. Taking into account growth rate, return on capital and personal savings, it is possible to capture the historical dynamics of wealth inequality in the United States during the course of the 20th century. The personal savings rate is shown to be the single most important factor that governs the wealth inequality dynamics. Notably, its major decrease in the past 30 years can be associated with the current wealth inequality surge. The asymptotic dynamic behavior of wealth inequality, on the other hand, emphasize the importance of the economic output growth rate. Furthermore, the effects changes in the income distribution have on the distribution of wealth are discussed. Plausible changes in income tax are found to have an insignificant effect on wealth inequality, in the short run. The results imply, therefore, that controlling income inequality is an impractical tool for regulating wealth inequality. Close
Yonatan Berman, Eshel Ben-Jacob and Yoash Shapira
286 The climate-finance macro-network: mapping the exposures of the financial system to climate policy risks in the Euro Area [abstract]
Abstract: In the wake of the recent international climate negotiations there is growing interest on the impact of climate policies on the financial system and the possible role of financial institutions in facilitating decarbonization pathway of the global economy. However, there are no established methodologies to assess gains and losses, and data is scarce and scattered. Further, while it is now understood that the interlinkages among financial institutions can amplify both positive and negative shocks to the financial system, this is seldom investigated. Here, we take a complex-systems perspective to climate policies and we develop a methodology to map the macro-network of financial exposures among the institutional sectors (e.g. non-financial corporations, investment funds, banks, insurance and pension funds, governments and households). This macro-network can be regarded as a multiplex weighted network in which multiple types of links correspond to different financial instruments: equity holdings (ownership shares), corporate and sovereign bonds (tradable debt obligations) and loans (non-tradable debt obligations). We illustrate the approach on recently available data by investigating the evolution of the macro-network of institutional sectors in the Euro Area. In particular, we estimate the exposures of the financial sectors to climate-policy risks, building on our previously developed climate-stress approach (Battiston 2016, ssrn 2726076). We find that while direct exposures to the fossil sector are limited, the combined exposures to other climate relevant sectors are large for both insurance, pension funds and investment funds (about 30%-40%). Further, these sectors bear large indirect exposures via banks to the housing sector. As a result of climate policies supporting green technologies and discouraging brown technologies, large portions of assets on the balance sheet of financial institutions are potentially subject to positive or negative revaluation. Our work contributes to a better understanding of the governance of climate-finance arena. Close
Veronika Stolbova and Stefano Battiston
238 Circadian Rhythm of Cancellation Rates in Foreign Currency Market [abstract]
Abstract: The recent proliferation of automated traders increase significantly the reaction speed of financial markets. As a consequence, new detailed database becomes available to help researchers to describe precisely impacts of some characteristics on the market as a whole. For example, the field of Econophysics emerged to focus on market microstructure using physics methodology especially to describe order book fluctuation [1]. Market participants annihilate their orders either via cancellation or transaction. Then, cancellation of orders play a major role in market fluctuation and an increasing number of researches study this subject [2]. Our research mainly focus on studying the rate at which limit orders are cancelled in Foreign Currency Market according to the time of the day and the distance from the market price. We use a precise database of Electronic Broking System (EBS) which contains identification of every order. The database is composed of three weeks. Two of them are from March 06 21:00 (GMT) to March 18 21:00 (GMT), 2011 and one week is from October 30 21:00 (GMT) to November 04 21:00 (GMT), 2011. It contains information about injected and annihilated orders with minimal tick time of one millisecond. Our study mainly focus on USD/JPY, EUR/USD and EUR/JPY currency pairs. In investigating the cancellation rate of limit orders, we discover that it follows a circadian rhythm similar to transactions. In addition, cancellation rate of limit orders is high when the distance from market price is low and vice-versa. In other words, market participants are less patient when their orders have a small distance from the market price. [1] M. Takayasu, T. Watanabe and H. Takayasu, Approaches to Large-Scale Business Data and Financial Crisis, Springer, 2010 [2] X-H Ni, Z-Q Jiang, G-F Gu, F. Ren, W. Chen and W-X Zhou, Phy. A 389, 2751–2761 (2010) Close
Jean-François Boilard, Misako Takayasu and Hideki Takayasu