Privacy-Preserving Methods for Sharing Financial Risk Exposures
Emmanuel A. Abbe
Ecole Polytechnique Fédérale de Lausanne
Massachusetts Institute of Technology (MIT)
Andrew W. Lo
Massachusetts Institute of Technology (MIT) - Sloan School of Management; Massachusetts Institute of Technology (MIT) - Computer Science and Artificial Intelligence Laboratory (CSAIL); National Bureau of Economic Research (NBER)
November 19, 2011
Unlike other industries in which intellectual property is patentable, the financial industry relies on trade secrecy to protect its business processes and methods, which can obscure critical financial risk exposures from regulators and the public. We develop methods for sharing and aggregating such risk exposures that protect the privacy of all parties involved and without the need for a trusted third party. Our approach employs secure multi-party computation techniques from cryptography in which multiple parties are able to compute joint functions without revealing their individual inputs. In our framework, individual financial institutions evaluate a protocol on their proprietary data which cannot be inverted, leading to secure computations of real-valued statistics such a concentration indexes, pairwise correlations, and other single- and multi-point statistics. The proposed protocols are computationally tractable on realistic sample sizes. Potential financial applications include: the construction of privacy-preserving real-time indexes of bank capital and leverage ratios; the monitoring of delegated portfolio investments; financial audits; and the publication of new indexes of proprietary trading strategies.
Number of Pages in PDF File: 28
Keywords: Systemic Risk, Risk Management, Financial Crisis, Cryptography, Security Multi-Party Computation
JEL Classification: G12, G14, C70, D70, D82, L50working papers series
Date posted: November 20, 2011 ; Last revised: November 25, 2011
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