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Minimization of Systemic Risk for Directed Network Using Genetic Algorithm

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Applications of Evolutionary Computation (EvoApplications 2017)

Part of the book series: Lecture Notes in Computer Science ((LNTCS,volume 10199))

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Abstract

In directed networks, flow dynamics may lead to cascade failures due to node and link removal. The systemic risk in financial systems follows similar mechanism, where banks are connected by interbank linkages with money transfers. A mathematical model of the banking network is used to investigate the relationships between the cascade dynamics and key parameters determining the banking network structure, including the connectivity, the bank’s capitalization, and the size of interbank exposure, based on analytical calculations and numerical simulations. To optimize the network topology for the minimization of systemic risk, genetic algorithm is applied to evolve the network. It is observed that the systemic risk of financial system could be decreased by increasing the degree variance of the associated network. This could be useful for financial risk management, with possible applications to other physical systems such as ecological web, where the network stability is also an important issue.

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Authors and Affiliations

  1. Department of Physics, The Hong Kong University of Science and Technology, Clear Water Bay, Kowloon, Hong Kong

    Wenshuo Guo & Kwok Yip Szeto

Authors
  1. Wenshuo Guo
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  2. Kwok Yip Szeto
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Correspondence to Kwok Yip Szeto .

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Editors and Affiliations

  1. Politecnico di Torino, Turin, Italy

    Giovanni Squillero

  2. Edinburgh Napier University, Edinburgh, United Kingdom

    Kevin Sim

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Guo, W., Szeto, K.Y. (2017). Minimization of Systemic Risk for Directed Network Using Genetic Algorithm. In: Squillero, G., Sim, K. (eds) Applications of Evolutionary Computation. EvoApplications 2017. Lecture Notes in Computer Science(), vol 10199. Springer, Cham. https://doi.org/10.1007/978-3-319-55849-3_1

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  • DOI: https://doi.org/10.1007/978-3-319-55849-3_1

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  • Publisher Name: Springer, Cham

  • Print ISBN: 978-3-319-55848-6

  • Online ISBN: 978-3-319-55849-3

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