Monday, October 25, 2010

The Global Financial System as a Network

. Monday, October 25, 2010




We have been hard at work striving to apply some network concepts to the international financial system. Among other things, we managed to figure out (and by we I really mean Will) how to use R to visualize weighted network data. The two pictures here, which depict cross-border equity assets (stock) in 1980 and 2001, is one result of this effort. The 18 countries account for about 80 percent of global financial transactions (exclusive of government/central bank official reserve transactions). The thickness of the red and black reflect the absolute value of the assets placed by country A in country B. We need to add arrows here to make the direction clearer. Suffice it to say that the thick black lines linking to the US represent equity assets placed in the US market. Red lines emanating from the US represent US equity assets in the foreign market. Notice that these ties are substantially thicker in 2001 than they are in 1980, indicating the growth of cross-border equity investment since 1980.


Node size reflects the relative importance of that market in the global financial system. I was not surprised by the stability of the US position between 1980 and 2001; I was surprised by the dramatic change in the UK position. We are working to determine when, exactly, this huge growth in the importance of the London market occurred. Post 1987 I would guess. I am a bit surprised at how little change there is otherwise. In a period that we think of as financial globalization and redistribution of economic power, these figures suggest that more capital flowed across borders, but it went basically to the same place in 2001 that it went in 1980--to the US.

More of this to come in the future.

I should note that we generated these figures using the tnet R package developed by Tore Opsahl. Thank you, Tore, for making this available. The underlying data come from Kubelec, Chris and Sa, Filipa G., The Geographical Composition of National External Balance Sheets: 1980-2005 (March 23, 2010). Bank of England Working Paper No. 384. Available at SSRN: http://ssrn.com/abstract=1577143.

3 comments:

Anonymous said...

Who the hell is will? If it's kindred, then why can't you use kindred, which is what the person uses in his/ herposts.

Emmanuel said...

(1) I remember the BIS folks using similar social network analysis software to plot capital flows though I cannot retrieve the paper just now.

(2) I'm surprised that you're surprised about the UK result. As for when the UK - London more specifically - became more prominent in the 80s with regard to cross-border capital flows, it's very easy and I have a date for you: 27 October 1986 - the Big Bang that liberalized the stock exchange here.

Emmanuel, Grizzled IPE Veteran

Thomas Oatley said...

Could also be a consequence of capital account liberalization which I think was late 1979 rather than the big bang

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