Romeil Sandhu, Tryphon Georgiou, and Allen Tannenbaum
Journal of Science (Science Advances)
Publication year: 2016

Quantifying the systemic risk and fragility of financial systems is of vital importance in analyzing market efficiency, deciding on portfolio allocation, and containing financial contagions. At a high level, financial systems may be represented as weighted graphs that characterize the complex web of interacting agents and information flow (for example, debt, stock returns, and shareholder ownership). We show that fragility is a system-level characteristic of “business-as-usual” market behavior and that financial crashes are invariably preceded by system-level changes in robustness. This work lays the foundation of understanding how to design (banking) systems and policy regulations in a manner that can combat financial instabilities exposed during the 2007–2008 crisis.