Optimal Network Compression

33 Pages Posted: 8 Oct 2020 Last revised: 8 Feb 2021

See all articles by Hamed Amini

Hamed Amini

Georgia State University

Zachary Feinstein

Stevens Institute of Technology - School of Business

Date Written: August 20, 2020

Abstract

This paper introduces a formulation of the optimal network compression problem for financial systems. This general formulation is presented for different levels of network compression or rerouting allowed from the initial inter-bank network. We prove that this problem is, generically, NP-hard. We focus on objective functions generated by systemic risk measures under systematic shocks to the financial network. We conclude by studying the optimal compression problem for specific networks; this permits us to study the so-called robust fragility of certain network topologies more generally as well as the potential benefits and costs of network compression.

Keywords: systemic risk, financial networks, portfolio compression, genetic algorithm

JEL Classification: D85, G01, G28

Suggested Citation

Amini, Hamed and Feinstein, Zachary, Optimal Network Compression (August 20, 2020). Available at SSRN: https://ssrn.com/abstract=3677587 or http://dx.doi.org/10.2139/ssrn.3677587

Hamed Amini (Contact Author)

Georgia State University ( email )

Georgia State University
Atlanta, GA 30303
United States

Zachary Feinstein

Stevens Institute of Technology - School of Business ( email )

Hoboken, NJ 07030
United States

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