Network Models in Finance

Expansive overview of theory and practical implementation of networks in investment management Guided by graph theory, Network Models in Finance: Expanding the Tools for Portfolio and Risk Management provides a comprehensive overview of networks in investment management, delivering strong knowledge of various types of networks, important characteristics, estimation, and their implementation in portfolio and risk management. With insights into the complexities of financial markets with respect to how individual entities interact within the financial system, this book enables readers to construct diversified portfolios by understanding the link between price/return movements of different asset classes and factors, perform better risk management through understanding systematic, systemic risk and counterparty risk, and monitor changes in the financial system that indicate a potential financial crisis. With a practitioner-oriented approach, this book includes coverage of: Practical examples of broad financial data to show the vast possibilities to visualize, describe, and investigate markets in a completely new way Interactions, Causal relationships and optimization within a network-based framework and direct applications of networks compared to traditional methods in finance Various types of algorithms enhanced by programming language codes that readers can implement and use for their own data Network Models in Finance: Expanding the Tools for Portfolio and Risk Management is an essential read for asset managers and investors seeking to make use of networks in research, trading, and portfolio management.

Preface ix  Acknowledgments xv  About the Authors xvii  Part One  Chapter 1 Introduction 3  Chapter 2 The Basic Structure of a Network 29  Chapter 3 Network Properties 45  Chapter 4 Network Centrality Metrics 71  Part Two  Chapter 5 Network Modeling 95  Chapter 6 Foundations for Building Portfolio Networks – Link Prediction and Association Models 117  Chapter 7 Foundations for Building Portfolio Networks – Statistical and Econometric Models 141  Chapter 8 Building Portfolio Networks – Probabilistic Models 163  Chapter 9 Network Processes in Asset Management 181  Chapter 10 Portfolio Allocation With Networks 227  Part Three  Chapter 11 Systematic and Systemic Risk, Spillover, and Contagion 261  Chapter 12 Networks in Risk Management 277  References 313  Index 327