Process Systems Engineering as a Modeling Paradigm for Analyzing Systemic Risk in Financial Networks

Posted: 21 May 2019

See all articles by Richard M. Bookstaber

Richard M. Bookstaber

Board of Regents - University of California Office of the CIO

Paul Glasserman

Columbia Business School

Garud Iyengar

Columbia University - Department of Industrial Engineering and Operations Research (IEOR)

Yu Luo

Columbia University - Department of Chemical Engineering

Venkat Venkatasubramanian

Purdue University

Zhizun Zhang

Columbia University, Department of Chemical Engineering, Students

Date Written: February 11, 2015

Abstract

Financial instability often results from positive feedback loops intrinsic to the operation of the financial system. The challenging task of identifying, modeling, and analyzing the causes and effects of such feedback loops requires a proper systems engineering perspective lacking in the remedies proposed in recent literature. We propose that signed directed graphs (SDG), a modeling methodology extensively used in process systems engineering, is a useful framework to address this challenge. The SDG framework is able to represent and reveal information missed by more traditional network models of financial system. This framework adds crucial information to a network model about the direction of influence and control between nodes, providing a tool for analyzing the potential hazards and instabilities in the system. This paper also discusses how the SDG framework can facilitate the automation of the identification and monitoring of potential vulnerabilities, illustrated with an example of a bank/dealer case study.

Suggested Citation

Bookstaber, Richard M. and Glasserman, Paul and Iyengar, Garud and Luo, Yu and Venkatasubramanian, Venkat and Zhang, Zhizun, Process Systems Engineering as a Modeling Paradigm for Analyzing Systemic Risk in Financial Networks (February 11, 2015). Office of Financial Research Working Paper No. 15-01. Available at SSRN: https://ssrn.com/abstract=2648458 or http://dx.doi.org/10.2139/ssrn.2648458

Richard M. Bookstaber (Contact Author)

Board of Regents - University of California Office of the CIO ( email )

1111 Broadway
Oakland, CA 94607
United States

Paul Glasserman

Columbia Business School ( email )

3022 Broadway
403 Uris Hall
New York, NY 10027
United States
212-854-4102 (Phone)
212-316-9180 (Fax)

Garud Iyengar

Columbia University - Department of Industrial Engineering and Operations Research (IEOR) ( email )

331 S.W. Mudd Building
500 West 120th Street
New York, NY 10027
United States
+1 212-854-4594 (Phone)
+1 212-854-8103 (Fax)

Yu Luo

Columbia University - Department of Chemical Engineering ( email )

500 W. 120th St.
New York, NY 10027
United States

HOME PAGE: http://https://l16cn.github.io

Venkat Venkatasubramanian

Purdue University ( email )

School of Chemical Engineering
West Lafayette, IN 47907
United States
7654940734 (Phone)
7654940805 (Fax)

Zhizun Zhang

Columbia University, Department of Chemical Engineering, Students ( email )

New York, NY
United States

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