[HN Gopher] The physics of financial networks
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The physics of financial networks
Author : Anon84
Score : 123 points
Date : 2021-06-10 11:40 UTC (11 hours ago)
(HTM) web link (arxiv.org)
(TXT) w3m dump (arxiv.org)
| bernardv wrote:
| Not again. Econophysics tried hard 15/20 years ago but really
| made no substantial contribution to our understanding of markets.
| paulpauper wrote:
| Eric weinstein has tried to apply physics concepts to economics
| , such as gauge theory. I dunno if he succeeded. I remember it
| generated at the time a lot of hype
| 0xBABAD00C wrote:
| Seems like a strange sentiment, evaluating a modeling approach
| based on historical analogies vs its own merits. If we're
| playing the historical analogies game, people were saying "not
| again" about Neural Networks up until mid/late 2000s.
| streamofdigits wrote:
| preprint version [available
| here](https://arxiv.org/abs/2103.05623)
| dang wrote:
| Ok, we've changed to arxiv.org from
| https://www.nature.com/articles/s42254-021-00322-5, which is
| hardwalled. Thanks!
| mistrial9 wrote:
| from the top of the paper:
|
| "As the total value of the global financial market has vastly
| outgrown the value of the real economy, financial institutions on
| this planet have created a web of interactions whose size and
| topology calls for a quantitative analysis by means of Complex
| Networks."
|
| refer to _Capital in the Twenty-First Century_ :
|
| "The book's central thesis is that when the rate of return on
| capital (r) is greater than the rate of economic growth (g) over
| the long term, the result is concentration of wealth, and this
| unequal distribution of wealth causes social and economic
| instability."
|
| regarding models, in a conclusion of Nature paper:
|
| "Differently from other networks, here nodes have some ability to
| anticipate the future, including the future structure of the
| network and try to take advantage of it. Although in reality such
| ability is much more limited than what models in mainstream
| economics postulate, it represents a circularity in the model
| that is difficult to treat with analytical or statistical tools.
| "
|
| so, participants use models and apply them to change behavior,
| making the system harder to model (!)
| ludamad wrote:
| "so, participants use models and apply them to change behavior,
| making the system harder to model (!)"
|
| I am ignorant here, but isn't this property true of iterated
| prisoner dilemma situations? Is game theory not an adequate
| model here?
| dredmorbius wrote:
| Hard paywall.
| dredmorbius wrote:
| Arxiv / preprints available:
|
| https://news.ycombinator.com/item?id=27460258
| dang wrote:
| Changed now. Thanks!
| chirau wrote:
| The full paper is here
|
| https://arxiv.org/pdf/2103.05623.pdf
| dang wrote:
| Ok, we've changed to arxiv.org from
| https://www.nature.com/articles/s42254-021-00322-5, which is
| hardwalled. Thanks!
| mooneater wrote:
| Was hoping to find out who the next LTCM or Bear Stearns is.
| anthony_r wrote:
| > _" As the total value of the global financial market outgrew
| the value of the real economy"_ - the first sentence
|
| What the hell is this supposed to mean? What is "value" here, can
| financial markets conjure more houses, crops or datacenter
| capacity? Or does it mean that "market prices of securities" have
| outpaced the "market prices of" .. "the real thing"? Like,
| seriously, what?
| T-A wrote:
| Suppose you have some expectation about the closing value of
| the S&P500 in a month's time. You can bet on it using a variety
| of financial instruments, e.g. options and futures.
|
| How much you bet is up to you and your counterparty; the amount
| is not in any way constrained by the actual value of the
| companies in the S&P500.
|
| And that's how the size of the derivatives market can look like
| this when compared to the stock market:
|
| https://www.visualcapitalist.com/all-of-the-worlds-money-and...
| mrh0057 wrote:
| A fancy way of saying an equities bubble.
| mrh0057 wrote:
| I guess I have to explain. The reason it's a definition of a
| bubble is due to compounding. If the economy is growing at 1
| to 3% while equities are going up 7 to 10% a year they
| diverge slowly at first but the divergence is exponential.
| What ends up happening it takes far more debt to sustain this
| bubble. Interest have to keep doing down so the payments stay
| relatively the same but at some point rates can't go lower or
| a shock causing the ability to pay goes away. Then the bubble
| pops causing a liquidity problem(2008, March 2020) causing a
| massive sale off of the most liquid assets. So far the
| governments of the world have been transferring the
| liabilities of the most toxic liabilities from banks, pension
| funds, etc to the Central banks. It is an asset swap and
| doesn't inflate the money supply directly but what it does do
| is tell banks lend all you want if you blow yourself up we
| will bail you out. This further inflates the debt bubble
| since banks now believe the fed has backstopped their loans
| there by limiting downside risks. This money being created
| has to go some where so it goes into asset purchases. Then
| you have margin and loans based on the assets further
| inflating then bubble. This creates a feedback loop since the
| increase in the asset prices increases the amount of money
| available to borrow which is often used to buy other assets
| further increasing the price.
| anthony_r wrote:
| Yup, it's literally just "being bearish". If you want to see
| people "being bearish" or "being bullish" just flip on the
| CNBC or something and listen.
|
| You either claim that the interest rate (or various risk
| premia) are too low, or that the estimates of future profits
| (for whatever reason, higher COGS, higher cost of labor,
| higher taxes, under-measured depreciation and higher capex,
| natural calamities, lower GDP and thus lower revenues, or
| really any other reason) are too high.
| dangerlibrary wrote:
| Yes.
|
| The market prices of securities, and (critically) the returns
| on those securities, are now higher than the book value and
| returns of the cash invested in companies whose shares back
| those securities.
| anthony_r wrote:
| The market value of stocks and corporate bonds is pretty much
| always larger than the book value of the underlying
| companies. If this is not the case you've found yourself in a
| 1931-type of a bargain.
|
| The delta between the book value and the securities pricing
| is the estimated future profits. Now how exactly did you
| arrive at the conclusion that the future profits estimation
| is too high?
| bordercases wrote:
| How did you arrive at the conclusion that your estimates
| were correct in the first place? That argument cuts both
| ways.
| [deleted]
| dangerlibrary wrote:
| I didn't come to that conclusion, and you are ignoring the
| part of my comment pointing out that the critical switch is
| that the _returns_ on securities now exceed _returns_ on
| actual businesses.
|
| But, since we're now talking about overvalued securities:
|
| https://www.npr.org/2021/05/05/993754418/planet-money-
| the-10...
| [deleted]
| alimw wrote:
| These guys' models can have multiple solutions. To me, that would
| indicate a problem with the model. But they are happy enough just
| to select the most optimistic solution.
| teorema wrote:
| I have to read the paper thoroughly but I've come to the
| opinion that multiple solutions aren't in of themselves a
| problem if they are incorporated into inferences. A lot of
| Bayesian inference can be thought of as involving solution
| spaces, for instance, where you're assigning a probability to
| each solution.
|
| Not disagreeing with you, just wondering out loud if it could
| be revisited with other methods.
| epistasis wrote:
| I don't do financial modeling, but in all other areas of
| modeling it's definitely the case that there are many different
| "solutions" by which I'm guessing you mean local optima.
|
| Having multiple solutions is somewhat equivalent to having
| different states of matter in physics. And economies definitely
| have very different modes, or states, that we call recessions
| or booms. Being able to have these sorts of local optima would
| seem to be necessary foe any model of an economy.
|
| But I may not be understanding you, because we are using the
| same words in different ways...
| carlob wrote:
| I took a class of econophysics in grad school and one of the
| models with studied was a very simple generational model to
| explain inflation. It was originally discarded because it had
| an unrealistic solution with very high inflation, however it
| turned out to be a very good model for how hyperinflation can
| arise with a relatively small change in parameters. This was
| made particularly poignant given that the professor was
| Argentinian.
| alimw wrote:
| This turns out to be a review paper by the same authors which
| only mentions the model I wanted to criticise. It's unlikely
| that one of the original papers will ever turn up on HN
| though! I was surprised to see this.
|
| As I recall they began by adopting a structural model for
| debt valuation that assumes no dependence on any external
| assets other than the debtor's. Then they reintroduce full
| n-dimensional dependence through a different mechanism they
| made up to try and force the 1-dimensional solutions into a
| state of consistency. It's a bit of a mess.
|
| Actually you're right. The presence of multiple solutions is
| not in itself enough to make me hate the model. The analogy
| relating different economic regimes to different phases of
| matter is potentially a good one.
| XnoiVeX wrote:
| As statistician George Box said, "All models are wrong, but
| some are useful"
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