Identification of Critical Nodes and Links in Financial Networks With Intermediation and Electronic Transactions

Abstract

In this paper, we propose a network performance/efficiency measure for the evaluation of financial networks with intermediation. The measure captures risk, transaction cost, price, transaction flow, revenue, and demand information in the context of the decision-makers' behavior in multitiered financial networks that also allow for electronic transactions. The measure is then utilized to define the importance of a financial network component, that is, a node or a link, or a combination of nodes and links. Numerical examples are provided in which the efficiency of the financial network is computed along with the importance ranking of the nodes and links. The results in this paper can be used to assess which nodes and links in financial networks are the most vulnerable in the sense that their removal will impact the efficiency of the network in the most significant way. Hence, the results in this paper have relevance to national security as well as implications for the insurance industry.

Keywords: financial networks, financial intermediation, risk management, portfolio optimization, complx networks, supernetworks, critical infrastructure networks, electronic finance, network performance, network security, network vulnerability, network disruptions

JEL Classification: C61, C63, L1, G10, G20, G22