Nature Physics focuses on complex networks in finance

• The challenges to economic stability posed by complex financial networks are the main subject of the March issue of Nature Physics Focus.
• Network scientists, economists and regulators team-up for the first time to discuss this problem.
• Why financial networks get unstable; network approaches pursued by regulators; and future research avenues are some of the subjects of the Focus.

The financial crisis has made us aware that financial markets are very complex networks that, in many cases, we do not really understand and that can easily go out of control. This idea, which would have been shocking only 5 years ago, results from a number of precise reasons. In March’s Nature Physics Focus, for the first time, network scientists, economists and regulators team-up to discuss for a wider audience the fundamental challenges posed by complex financial networks to the stability of our economies. The Focus consists of four interconnected papers that: offer some intuition of why financial networks can get so complex and unstable; provide examples of the new network approaches that are currently pursued by regulators; and indicate research avenues that should to be explored in the future.

The Focus represents an important outcome of the work carried out in the European project Forecasting Financial Crises – FOC – (www.focproject.eu) that deals with alternative methods to model economic complexity and financial crises. Two of the papers have also been supported by the Institute of New Economic Thinking.

Overall, the arguments and the findings presented in the Focus could be roughly summarized as follows. Systemic risk is not a remote event but a typical situation of financial networks let on their own dynamics. Systemic risk is an emerging property — an externality in the economic jargon — that arises from the complex interaction of the private economic interests of market players. More data and more network science can help us shaping institutions and markets that are better suited for the good of society at large. However, financial regulation is of little effect if the economic influence of big market playersis not seriously addressed.

The authors include the Nobel prize for economics Joseph Stiglitz, the mathematician and ecologist Lord Robert May, a representative of the Bank of England and former European Central Bank adviser (Marco Galbiati), a representative of the Deutsche Bundesbank (Co-Pierre Georg), and the two founders of the FOC project (Guido Caldarelli and Stefano Battiston). The other authors include both economists and physicists.