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...
Near as I can tell, the critical sentence here is "I further claim that network theory provides a useful set of analytical tools to model the complex interdependencies that such financial contracts create."
ReplyDeleteMy own view is that this could be more specific and sharper.