Colloquium-Scott Pauls (Dartmouth)-Systemic Risk: Robustness and Fragility in Trade Networks

Mathematics - Colloquium

Friday, December 6, 2013
11:00 AM-12:00 PM

Stratton Hall
203

ABSTRACT: In the 1980s, Perrow coined the term "normal accident" to describe an aspect of systemic risk - when dealing with complex, tightly coupled systems, redundancies and safeguards are often not enough. In this talk, we'll explore systemic risk in an organic system which changes and evolves over time. This system, the World Trade Web (WTW), is the collection of worldwide trading relationships between countries. Our goal is to better understand the risk that a country exposes itself to through mere participation in trade. We find situations echoing the normal accidents, where participants in the WTW are exposed to risk no matter what choices they make or safeguards they put in place.

To measure risk, we shock the network and allow it to respond according to an economically grounded dynamic model. Observing the outcome provides a measure of fragility. We have two major findings. First, the WTW falls in a "robust yet fragile" category: it is robust to relatively small shocks but not to larger ones. Second, for small shocks, increasing edge density correlates with increasing robustness while for large shocks, the opposite is true. This supports the view that globalization, as witnessed by growing edge density, increases the ability of a system to absorb shock up until a certain size, whereupon the shock overwhelms the system and sparks a broader contagion.

We isolate new network statistics that explain much of the behavior of WTW systems, finding in most times, that the local characteristics of the network drive robustness. However, in times of significant crisis, we see network effects playing a substantial role. In the latter cases, we see evidence of our notion of systemic risk - all members of the WTW are significantly affected by aspects of the network topology. This finding is realized empirically in the economic crisis of the late 1990s, where a dramatic change in the behavior of the model echoes the economic contagion emanating from the collapse of several Asian economies.

Many of the results discussed in this talk are from:
N. Foti, S. Pauls, and D. Rockmore. Stability of the world trade network over time: an extinction analysis, JEDC, 37:9 (2013), 1889-1910. (http://dx.doi.org/10.1016/j.jedc.2013.04.009).

Suggested Audiences: Adult, College

E-mail: ma-chair@wpi.edu

Last Modified: November 25, 2013 at 3:52 PM