Why networks matter in finance...

I have recently been on the defensive regarding the importance of networks in financial markets, and I feel that I have not done a good job of explaining my position to a sceptical audience.  This post is an attempt to organize my thoughts on the subject in a manner that will make sense to non-network people.  For those readers who are "network people" and want to understand why/how networks matter check out the Financial Network Analysis research database.

First of all, I don't like the claim "networks matter."  It is much too general a statement to be of any use.  Context matters.  I claim that within the context of finance, thinking about the functioning (or lack thereof) of financial markets requires considering the inter-weaving of financial contracts across space and across time.  I further claim that network theory provides a useful set of analytical tools to model the complex interdependencies that such financial contracts create.

How does this relate to my own research? At its core, my model is a story about how spillovers across time are transformed by the credit network into spillovers across space.  The chief result being that the density of the network of financial contracts plays a key role in amplifying the transformation of spillovers across time into spillovers across space.

Does this make any sense?  I really made an effort to distil my point as much as possible...