Assessing systemic risk in financial markets using dynamic topic networks

Contingent convertible bonds in financial networks

We study the role of contingent convertible bonds (CoCos) in a complex network of interconnected banks. By studying the system's phase transitions, we reveal that the structure of the interbank network is of fundamental importance for the effectiveness of CoCos as a financial stability enhancing mechanism. Our results show that, under some network structures, the presence of CoCos can increase (and not reduce) financial fragility, because of the occurring of unneeded triggers and consequential suboptimal conversions that damage CoCos investors. We also demonstrate that, in the presence of a moderate financial shock, lightly interconnected financial networks are more robust than highly interconnected networks. This makes them a potentially optimal choice for both CoCos issuers and buyers.

Enhancing the Predictive Power of Google Trends Data Through Network Analysis: Infodemiology Study of COVID-19

BACKGROUND

The COVID-19 outbreak has revealed a high demand for timely surveillance of pandemic developments. Google Trends (GT), which provides freely available search volume data, has been proven to be a reliable forecast and nowcast measure for public health issues. Previous studies have tended to use relative search volumes from GT directly to analyze associations and predict the progression of pandemic. However, GT's normalization of the search volumes data and data retrieval restrictions affect the data resolution in reflecting the actual search behaviors, thus limiting the potential for using GT data to predict disease outbreaks.

OBJECTIVE

This study aimed to introduce a merged algorithm that helps recover the resolution and accuracy of the search volume data extracted from GT over long observation periods. In addition, this study also aimed to demonstrate the extended application of merged search volumes (MSVs) in combination of network analysis, via tracking the COVID-19 pandemic risk.

METHODS

We collected relative search volumes from GT and transformed them into MSVs using our proposed merged algorithm. The MSVs of the selected coronavirus-related keywords were compiled using the rolling window method. The correlations between the MSVs were calculated to form a dynamic network. The network statistics, including network density and the global clustering coefficients between the MSVs, were also calculated.

RESULTS

Our research findings suggested that although GT restricts the search data retrieval into weekly data points over a long period, our proposed approach could recover the daily search volume over the same investigation period to facilitate subsequent research analyses. In addition, the dynamic time warping diagrams show that the dynamic networks were capable of predicting the COVID-19 pandemic trends, in terms of the number of COVID-19 confirmed cases and severity risk scores.

CONCLUSIONS

The innovative method for handling GT search data and the application of MSVs and network analysis to broaden the potential for GT data are useful for predicting the pandemic risk. Further investigation of the GT dynamic network can focus on noncommunicable diseases, health-related behaviors, and misinformation on the internet.

Quantum computing reduces systemic risk in financial networks

In highly connected financial networks, the failure of a single institution can cascade into additional bank failures. This systemic risk can be mitigated by adjusting the loans, holding shares, and other liabilities connecting institutions in a way that prevents cascading of failures. We are approaching the systemic risk problem by attempting to optimize the connections between the institutions. In order to provide a more realistic simulation environment, we have incorporated nonlinear/discontinuous losses in the value of the banks. To address scalability challenges, we have developed a two-stage algorithm where the networks are partitioned into modules of highly interconnected banks and then the modules are individually optimized. We developed a new algorithms for classical and quantum partitioning for directed and weighed graphs (first stage) and a new methodology for solving Mixed Integer Linear Programming problems with constraints for the systemic risk context (second stage). We compare classical and quantum algorithms for the partitioning problem. Experimental results demonstrate that our two-stage optimization with quantum partitioning is more resilient to financial shocks, delays the cascade failure phase transition, and reduces the total number of failures at convergence under systemic risks with reduced time complexity.