Sustainable Finance and Networks

Sustainable Finance and Networks

Master-level course; Fall 2020 semester.
 

Sustainable finance is today a strategic area of investment for both private and public institutions. Our society faces unprecedented sustainability challenges both in terms of environment, such as climate change and biodiversity loss, as well as social issues such as mounting inequality and the new risk of pandemics. Financial technologies play a crucial role for the functioning of the modern economy and for the management of both for macro-economic challenges (financial stability, growth, inequality) and for sustainability (climate risk, low-carbon transition, green growth, resilience to pandemics). Depending on financial technologies are used, they can either support the good management of these challenges, or, instead they can exacerbate their mismanagement. The discipline of financial networks is key to make this difference: many important unintended effects and externalities can only be captured by a financial network analysis. Three main effects propagate through networks of financial contracts: the exposure of portfolios to risk (e.g. systemic, climate), the impact of portfolios on social and climate objectives, and the creation and redistribution of wealth. Accordingly, the course will start from the basic notions of graph theory and progress towards developing network models of financial actors with a focus on the context of financial stability and climate-related risks.

 

Throughout this course, students will learn to master the theoretical notions needed to understand and use network models of financial contagion. During the practical exercises with provided software tools, the students will also acquire an operational know-how to analyze empirical financial networks from the perspective of systemic risk and how to carry out simple stress-tests on real financial networks.

 

Additional information: The final grade will be the weighted average of the following

  • 10% class active participation,
  • 50% individually submitted homeworks,
  • 40% presentation of the project.

 

References

  1. S. Battiston, G. Caldarelli, and M. D'Errico, “The financial system as a nexus of interconnected networks", in Interconnected Networks, pp. 195-229, Springer, 2016.
  2. S. Battiston, I. Mandel, Antoine Monasterolo, F. Schuetze, and G. Visentin, “A Climate stress-test of the EU financial system", Available at SSRN id=2726076, 2016.
  3. S. Battiston, G. Caldarelli, M. D'errico, and S. Gurciullo, “Leveraging the network : a stress-test framework based on DebtRank", Statistics and Risk Modeling, forthcoming, ssrn 2571218, pp. 1-33, 2016.
  4. S. Battiston, G. Caldarelli, R. May, T. Roukny, and J. E. Stiglitz, “The Price of Complexity in Financial Networks", SSRN 2594028, 2015.
  5. S. Battiston, M. D'Errico, and G. Visentin, “Leverage Networks: Rethinking Financial Contagion Across Models", 2016.
  6. S. Battiston, M. D’Errico, and G. Visentin, “Rethinking financial contagion," Preprint at http://ssrn.com/abstract, vol. 2831143, 2016.
  7. L. Eisenberg and T. H. Noe, “Systemic Risk in Financial Systems", Management Science, vol. 47, no. 2, pp. 236-249, 2001.
  8. H. Elsinger, A. Lehar, and M. Summer, “Risk Assessment for Banking Systems", Management Science, vol. 52, no. 9, pp. 1301-1314, 2006.
  9. P. Glasserman and H. P. Young, “How likely is contagion in financial networks?", Journal of Banking & Finance, vol. 50, pp. 383-399, 2015.
  10. L. C. G. Rogers and L. A. M. Veraart, “Failure and rescue in an interbank network", Management Science, vol. 59, no. 4, pp. 882-898, 2013.