Up: 3:1-2

The topology of macro financial flows: An application of stochastic flow diagrams

Neil J. Calkin; Marcos López de Prado

Algorithmic Finance (2014), 3:1-2, 43-85
DOI: 10.3233/AF-140033

Published: Abstract, PDF.
Archived: SSRN.


A large portion of Macroeconomic and Financial research is built upon classical applications of Linear Algebra (such as regression analysis) and Stochastic Calculus (such as valuation models). As a result, most Macroeconomic and Financial research has inherited a focus on geometric locations rather than logical relations. Ideally, Econometric models could be complemented with Topological and Graph-Theoretical tools that recognize the hierarchy and relationships between system constituents. Stochastic Flow Diagrams (SFDs) are topological representations of complex dynamic systems. We construct a network of financial instruments and show how SFDs allow researchers to monitor the flow of capital across the financial system. Because our approach is dynamic, it models how and for how long a financial shock propagates through the system. Practical applications include stress-testing of investment portfolios under user-defined scenarios, and the discovery of Macro trading opportunities. SFDs add Topology to the Econometric toolkit used by Macroeconomists, and may enlighten perennial controversies, such as the one involving Keynesians and Austrian-school economists. Our findings have important implications for regulators, market designers and Macro investors.

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Philip Maymin

University of Bridgeport

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Jayaram Muthuswamy

Kent State University

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Kenneth J. Arrow

Stanford University

Herman Chernoff

Harvard University

David S. Johnson

AT&T Labs Research

Leonid Levin

Boston University

Myron Scholes

Stanford University

Michael Sipser

Massachusetts Institute of Technology

Richard Thaler

University of Chicago

Stephen Wolfram

Wolfram Research

Editorial Board

Associate Editors

Peter Bossaerts

California Institute of Technology

Emanuel Derman

Columbia University

Ming-Yang Kao

Northwestern University

Pete Kyle

University of Maryland

David Leinweber

Lawrence Berkeley National Laboratory

Richard J. Lipton

Georgia Tech

Avi Silberschatz

Yale University

Robert Webb

University of Virginia

Affiliate Editors

Giovanni Barone-Adesi

University of Lugano

Bruce Lehmann

University of California, San Diego

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