Today we live in a global society. The Internet allows us to communicate instantly from anywhere around the world and people and goods can be moved around the earth at speeds unfathomable by people just one century ago. With this comes a global economy. There are trade connections all around the world that are growing increasingly stronger, and human society is becoming increasingly dependent on this. This leads me to the topic of my research, The Implications of a Global Financial System. I raise the questions, if financial institutions are so interconnected, what risks does this pose to the systemic health of the global financial system? What can the bankruptcy of one “Systemically Important Financial Institution” or SIFI, mean for the overall Financial System? I plan to answer these questions using network analysis derived from graph theory and game theory.
Graph theory is the study of how connections between things can be visually structured and their properties can be measured. It is useful in network analysis in order to view the structure of the network and how it affects the other members of the network. Graph theory has been the epicenter of the research done by my advisors Prof. Quintas and Prof. DuCasse for many years now.
Game theory the analysis of strategies for dealing with competitive situations where the outcome of a participant’s choice of action depends critically on the actions of other participants. Game theory will help us better understand how different financial institutions will act in the network they create.
By understanding the structure of the network created by financial institutions, and the way they interact with each other I am developing a model of the global nature of the financial system. Through this cross discipline analysis I believe it is possible to better understand how financial system functions as an aggregate and potentially discover a way to create a safer financial network.
I am conducting my research currently by studying more advanced topics in graph theory and game theory in order to expand the depth of my knowledge. This will help me model the financial system in the most articulate and accurate way. I am also studying the different methods in which economists measure exposure amongst financial institutions. Ultimately the plan for my model will be creating a graph where the nodes are financial institutions and the edges are weighted based on financial exposure. I will use this model to study the implications of exposure in the financial system and to discover how this can affect the health of the overall financial system.
In order to supplement my research with an example, I plan on conducting a case study using my model based upon The 2008 Financial Crisis, arguably triggered by the collapse of Lehman Brothers. I plan to evaluate the interconnected nature of Lehman Brothers and model the contagion their collapse caused in the financial system.