Wednesday, February 16, 2011

Modeling Global Financial Integration

. Wednesday, February 16, 2011

In the interest of shameless self-promotion, take a look at a cool animation that Kindred assembled from quarterly BIS banking data between 1999 and 2010. This network depiction stems from our first joint effort (and the "our" here includes Sarah Bauerle and Andrew Pennock as well as Will and me) to apply complex network theory to international financial integration (you can read the full paper here). The single frame above is one of 43 quarterly observations.


Some explanation. Ties between countries are weighted and directed. If country i holds bank assets in country j, a black curved line connecting the two nodes marks that tie. In this way, the out-degree of i is the in-degree of j. If j holds bank assets in i, a gray curved line marks that tie, and the out-degree of j is the in-degree of i. The thickness of a tie represents the size of the bank holdings. Node size is the sum of a country’s in-degrees originating from all other countries in the network. White nodes have a higher in-degree than out-degree, meaning that they are net recipients of financial assets. Gray nodes have a higher out-degree than in-degree, meaning the opposite.

The animation nicely illustrates the deepening of financial interdependence, as measured by cross-border banking deposits, in the first decade of the 21st century. It illustrates the accumulation of the financial imbalances that lay at the base of the 2008 crisis. It also highlights the centrality of the United States in the contemporary global financial system, even in spite of the United States' role as originator of the largest global financial crisis since the early 1930s.


UPDATE: [Credit where it's due: for the animation I worked off some basic code from Kieran Healy, found here. I modified it for our purposes of course, but without his basic gifpipe code I wouldn't've been able to put it together with my limited programming skills. So thanks, Kieran, for making your stuff publicly available.

Also, a nerdy request: I wasn't able to find a way to put the country labels outside the graph, next to the nodes. I.e., I can move all the labels up or down, left or right, some constant distance. But I want to move them all outward so they sit next to their respective nodes, rather than above/below/to the side of the node. They would be more clearly visible that way. Any suggestions? I'm using igraph, because it supports tnet, so it would have to be something that works with those packages. -wkw]


UPDATE II: [This is the best data available. So, the small number of nodes isn't a modeling choice, but rather an artifact of data limitations. This is all discussed in more detail in the actual paper. -wkw]

4 comments:

nick gogerty said...

Thomas, you may be interested in joining the Black swan group on linked in. It is private and the discussion focuses on risk metrics based on systems theory : tight coupling, feedback loops and wrong incentives leading to normal accidents. access is only for those doing academic research or managing risk for $100m in fiscal or physical assets.

Kieran said...

Nice animation; and I'm glad you found the pipe thing useful. On the labeling question, I think something like this should do what you want. There may be other more elegant solutions, but it's been a long time since I took trig.

Kieran said...

Nice animation; and I'm glad you found the pipe thing useful. On the labeling question, I think something like this should do what you want. There may be other more elegant solutions, but it's been a long time since I took trig.

Kindred Winecoff said...

Kieran -

Thanks a bunch. That looks like it'll work. I really appreciate it.

Modeling Global Financial Integration
 

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