arXiv subjects

Fabio Caccioli

Publications and source records attributed to Fabio Caccioli.

66 records · Page 4Linked to original sources

arXiv2012

Stability analysis of financial contagion due to overlapping portfolios

Common asset holdings are widely believed to have been the primary vector of contagion in the recent financial crisis. We develop a network approach to the amplification of financial contagion due to the combination of overlapping portfolios and leverage, and we show how it can be understood in terms of a generalized branching process. By studying a stylized model we estimate the circumstances under which systemic instabilities are likely to occur as a function of parameters such as leverage, market crowding, diversification, and market impact. Although diversification may be good for individual institutions, it can create dangerous systemic effects, and as a result financial contagion gets worse with too much diversification. Under our model there is a critical threshold for leverage; below it financial networks are always stable, and above it the unstable region grows as leverage increases. The financial system exhibits "robust yet fragile" behavior, with regions of the parameter space where contagion is rare but catastrophic whenever it occurs. Our model and methods of analysis can be calibrated to real data and provide simple yet powerful tools for macroprudential stress testing.

q-fin.GN↗

arXiv2012

A proposal for impact-adjusted valuation: Critical leverage and execution risk

The practice of valuation by marking-to-market with current trading prices is seriously flawed. Under leverage the problem is particularly dramatic: due to the concave form of market impact, selling always initially causes the expected leverage to increase. There is a critical leverage above which it is impossible to exit a portfolio without leverage going to infinity and bankruptcy becoming likely. Standard risk-management methods give no warning of this problem, which easily occurs for aggressively leveraged positions in illiquid markets. We propose an alternative accounting procedure based on the estimated market impact of liquidation that removes the illusion of profit. This should curb the leverage cycle and contribute to an enhanced stability of financial markets.

q-fin.GN↗

arXiv2012

Voter models with conserved dynamics

We propose a modified voter model with locally conserved magnetization and investigate its phase ordering dynamics in two dimensions in numerical simulations. Imposing a local constraint on the dynamics has the surprising effect of speeding up the phase ordering process. The system is shown to exhibit a scaling regime characterized by algebraic domain growth, at odds with the logarithmic coarsening of the standard voter model. A phenomenological approach based on cluster diffusion and similar to Smoluchowski ripening correctly predicts the observed scaling regime. Our analysis exposes unexpected complexity in the phase ordering dynamics without thermodynamic potential.

cond-mat.stat-mech↗

arXiv2011

Heterogeneity, correlations and financial contagion

We consider a model of contagion in financial networks recently introduced in the literature, and we characterize the effect of a few features empirically observed in real networks on the stability of the system. Notably, we consider the effect of heterogeneous degree distributions, heterogeneous balance sheet size and degree correlations between banks. We study the probability of contagion conditional on the failure of a random bank, the most connected bank and the biggest bank, and we consider the effect of targeted policies aimed at increasing the capital requirements of a few banks with high connectivity or big balance sheets. Networks with heterogeneous degree distributions are shown to be more resilient to contagion triggered by the failure of a random bank, but more fragile with respect to contagion triggered by the failure of highly connected nodes. A power law distribution of balance sheet size is shown to induce an inefficient diversification that makes the system more prone to contagion events. A targeted policy aimed at reinforcing the stability of the biggest banks is shown to improve the stability of the system in the regime of high average degree. Finally, disassortative mixing, such as that observed in real banking networks, is shown to enhance the stability of the system.

q-fin.GN↗

arXiv2011

Optimal Liquidation Strategies Regularize Portfolio Selection

We consider the problem of portfolio optimization in the presence of market impact, and derive optimal liquidation strategies. We discuss in detail the problem of finding the optimal portfolio under Expected Shortfall (ES) in the case of linear market impact. We show that, once market impact is taken into account, a regularized version of the usual optimization problem naturally emerges. We characterize the typical behavior of the optimal liquidation strategies, in the limit of large portfolio sizes, and show how the market impact removes the instability of ES in this context.

q-fin.PM↗

arXiv2010

Strong Noise Effects in one-dimensional Neutral Populations

The dynamics of well-mixed biological populations is usually studied by mean-field methods and weak-noise expansions. Similar methods have been applied also in spatially extended problems, relying on the fact that these populations are organized in colonies with a large local density of individuals. We provide a counterexample discussing a one-dimensional neutral population with negative frequency-dependent selection. The system exhibits a continuous phase transition between genetic fixation and coexistence unexpected from weak-noise arguments. We show that the behavior is a non-perturbative effect of the internal noise that is amplified by presence of spatial correlations (strong-noise regime).

cond-mat.stat-mech↗

arXiv2010

Dynamic facilitation picture of a higher-order glass singularity

We show that facilitated spin mixtures with a tunable facilitation reproduce, on a Bethe lattice, the simplest higher-order singularity scenario predicted by the mode-coupling theory (MCT) of liquid-glass transition. Depending on the facilitation strength, they yield either a hybrid glass transition or a continuous one, with no underlying thermodynamic singularity. Similar results are obtained for facilitated spin models on a diluted Bethe lattice. The mechanism of dynamical arrest in these systems can be interpreted in terms of bootstrap and standard percolation and corresponds to a crossover from a compact to a fractal structure of the incipient spanning cluster of frozen spins. Theoretical and numerical simulation results are fully consistent with MCT predictions.

cond-mat.dis-nn↗

arXiv2010

Critical fluctuations in spatial complex networks

An anomalous mean-field solution is known to capture the non trivial phase diagram of the Ising model in annealed complex networks. Nevertheless the critical fluctuations in random complex networks remain mean-field. Here we show that a break-down of this scenario can be obtained when complex networks are embedded in geometrical spaces. Through the analysis of the Ising model on annealed spatial networks, we reveal in particular the spectral properties of networks responsible for critical fluctuations and we generalize the Ginsburg criterion to complex topologies.

cond-mat.stat-mech↗

arXiv2010

On information efficiency and financial stability

We study a simple model of an asset market with informed and non-informed agents. In the absence of non-informed agents, the market becomes information efficient when the number of traders with different private information is large enough. Upon introducing non-informed agents, we find that the latter contribute significantly to the trading activity if and only if the market is (nearly) information efficient. This suggests that information efficiency might be a necessary condition for bubble phenomena, induced by the behavior of non-informed traders, or conversely that throwing some sands in the gears of financial markets may curb the occurrence of bubbles.

q-fin.TR↗

arXiv2010

Random Matrix approach to collective behavior and bulk universality in protein dynamics

Covariance matrices of amino acid displacements, commonly used to characterize the large-scale movements of proteins, are investigated through the prism of Random Matrix Theory. Bulk universality is detected in the local spacing statistics of noise-dressed eigenmodes, which is well described by a Brody distribution with parameter $β\simeq 0.8$. This finding, supported by other consistent indicators, implies a novel quantitative criterion to single out the collective degrees of freedom of the protein from the majority of high-energy, localized vibrations.

q-bio.QM↗

arXiv2009

Eroding market stability by proliferation of financial instruments

We contrast Arbitrage Pricing Theory (APT), the theoretical basis for the development of financial instruments, with a dynamical picture of an interacting market, in a simple setting. The proliferation of financial instruments apparently provides more means for risk diversification, making the market more efficient and complete. In the simple market of interacting traders discussed here, the proliferation of financial instruments erodes systemic stability and it drives the market to a critical state characterized by large susceptibility, strong fluctuations and enhanced correlations among risks. This suggests that the hypothesis of APT may not be compatible with a stable market dynamics. In this perspective, market stability acquires the properties of a common good, which suggests that appropriate measures should be introduced in derivative markets, to preserve stability.

q-fin.TR↗

arXiv2008

Ising model with memory: coarsening and persistence properties

We consider the coarsening properties of a kinetic Ising model with a memory field. The probability of a spin-flip depends on the persistence time of the spin in a state. The more a spin has been in a given state, the less the spin-flip probability is. We numerically studied the growth and persistence properties of such a system on a two dimensional square lattice. The memory introduces energy barriers which freeze the system at zero temperature. At finite temperature we can observe an apparent arrest of coarsening for low temperature and long memory length. However, since the energy barriers introduced by memory are due to local effects, there exists a timescale on which coarsening takes place as for the Ising model. Moreover the two point correlation functions of the Ising model with and without memory are the same, indicating that they belong to the same universality class.

cond-mat.stat-mech↗