Network geometry and market instability

Samal, Areejit, Pharasi, Hirdesh K, Ramaia, Sarath Jyotsna, Kannan, Harish, Saucan, Emil, Jost, Jürgen and Chakraborti, Anirban (2021) Network geometry and market instability. Royal Society Open Science, 8 (2): 201734. pp. 1-18. ISSN 20545703

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The complexity of financial markets arise from the strategic interactions among agents trading stocks, which manifest in the form of vibrant correlation patterns among stock prices. Over the past few decades, complex financial markets have often been represented as networks whose interacting pairs of nodes are stocks, connected by edges that signify the correlation strengths. However, we often have interactions that occur in groups of three or more nodes, and these cannot be described simply by pairwise interactions but we also need to take the relations between these interactions into account. Only recently, researchers have started devoting attention to the higher-order architecture of complex financial systems, that can significantly enhance our ability to estimate systemic risk as well as measure the robustness of financial systems in terms of market efficiency. Geometryinspired network measures, such as the Ollivier–Ricci curvature and Forman–Ricci curvature, can be used to capture the network fragility and continuously monitor financial dynamics. Here, we explore the utility of such discrete Ricci curvatures in characterizing the structure of financial systems, and further, evaluate them as generic indicators of the market instability. For this purpose, we examine the daily returns from a set of stocks comprising the USA S&P-500 and the Japanese Nikkei-225 over a 32-year period, and monitor the changes in the edge-centric network curvatures. We find that the different geometric measures capture well the system-level features of the market and hence we can distinguish between the normal or ‘businessas-usual’ periods and all the major market crashes. This can be very useful in strategic designing of financial systems and regulating the markets in order to tackle financial instabilities.

Item Type: Article
Keywords: Financial network; Geometry; Networks; Ricci curvature; Stock market
Subjects: Physical, Life and Health Sciences > Mathematics
JGU School/Centre: Jindal School of Government and Public Policy
Depositing User: Mr. Syed Anas
Date Deposited: 10 Dec 2021 17:24
Last Modified: 01 Feb 2023 05:14
Official URL:
Funders: Max Planck Society, Germany, German-Israeli Foundation (GIF), National Autonomous University of Mexico, Mexico


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