Focus
Complex networks in finance
- Focus issue:
- March 2013 Volume 9 No 3 pp119-197
The 2008 financial crisis has highlighted major limitations in the modelling of financial and economic systems. However, an emerging field of research at the frontiers of both physics and economics aims to provide a more fundamental understanding of economic networks, as well as practical insights for policymakers. In this Nature Physics Focus, physicists and economists consider the state-of-the-art in the application of network science to finance.
Editorial
Net gains - p119
doi:10.1038/nphys2588
Physics — and physicists — have had much to contribute to economic and finance. Now the science of complex networks sets a way forward to understanding and managing the complex financial networks of the world's markets.
Commentaries
Network opportunity - pp121 – 122
Michele Catanzaro and Mark Buchanan
doi:10.1038/nphys2570
Our developing scientific understanding of complex networks is being usefully applied in a wide set of financial systems. What we've learned from the 2008 crisis could be the basis of better management of the economy — and a means to avert future disaster.
Complex derivatives - pp123 – 125
Stefano Battiston, Guido Caldarelli, Co-Pierre Georg, Robert May and Joseph Stiglitz
doi:10.1038/nphys2575
The intrinsic complexity of the financial derivatives market has emerged as both an incentive to engage in it, and a key source of its inherent instability. Regulators now faced with the challenge of taming this beast may find inspiration in the budding science of complex systems.
Reconstructing a credit network - pp125 – 126
Guido Caldarelli, Alessandro Chessa, Andrea Gabrielli, Fabio Pammolli and Michelangelo Puliga
doi:10.1038/nphys2580
The science of complex networks can be usefully applied in finance, although there is limited data available with which to develop our understanding. All is not lost, however: ideas from statistical physics make it possible to reconstruct details of a financial network from partial sets of information.
Full text - Net gains | PDF (81KB) - Reconstructing a credit network
The power to control - pp126 – 128
Marco Galbiati, Danilo Delpini & Stefano Battiston
doi:10.1038/nphys2581
Understanding something of the complexity of a financial network is one thing, influencing the behaviour of that system is another. But new tools from network science define a notion of 'controllability' that, coupled with 'centrality', could prove useful to economists and financial regulators.
From the archives
Nature Physics Insight
Complexity
In many large ensembles, the property of the system as a whole cannot be understood from studying the individual entities alone — these ensembles can be made up by neurons in the brain, transport users in traffic networks or data packages in the Internet. The past decade has seen important progress in our fundamental understanding of what such seemingly disparate 'complex systems' have in common; some of these advances are surveyed here.
Editorial
No man is an island -
doi:10.1038/nphys1162
The financial crisis underlines the need for new economic models – models that can only be built by following a truly interdisciplinary approach.
Full text - Information storage | PDF (115KB) - Information storage
Commentary
Economics crisis
Thomas Lux & Frank Westerhoff
doi:10.1038/nphys1163
Economic theory failed to envisage even the possibility of a financial crisis like the present one. A new foundation is needed that takes into account the interplay between heterogeneous agents.
Full text -Fishing the Fermi sea | PDF (81KB) - Fishing the Fermi sea
Thesis
Gamble with time -
Mark Buchanan
doi:10.1038/nphys2520
"Probabilistic thinking has gone awry and stands in need of correction."
Full text - Gamble with time | PDF (65KB) - Gamble with time
It's a (stylized) fact! -
Mark Buchanan
doi:10.1038/nphys2191
"Theorists should work from "a stylized view of the facts" and "concentrate on broad tendencies"."
Full text - It's a (stylized) fact! | PDF (74KB) - It's a (stylized) fact!
The value of the future -
Mark Buchanan
doi:10.1038/nphys2039
"The best analyses of the most pressing problems hinge almost entirely on arbitrary techniques for discounting the future."
Full text - The value of the future | PDF (73KB) - The value of the future
Waiting for the maths -
Mark Buchanan
doi:10.1038/nphys1443
"Physicists may well contribute by improving the richness of the mathematics that economists use."
Full text - Waiting for the maths | PDF (89KB) - Waiting for the maths
A little more conversation -
Mark Buchanan
doi:10.1038/nphys1059
"A real convergence of the economics and physics cultures still seems remote, yet there are encouraging signs..."
Full text - A little more conversation | PDF (122KB) - A little more conversation