Big Data and Graph Theoretic Models: Simulating the Impact of Collateralization on a Financial System

Abstract

In this paper, we simulate and analyze the impact of financial regulations concerning the collateralization of derivative trades on systemic risk. We represent a financial system using a weighted directed graph model. We enhance a novel open source risk engine to automatically classify a financial regulation for its impact on systemic risk. The analysis finds that introducing collateralization does reduce the costs of resolving a financial system in crisis. It does not, however, change the distribution of risk in the system. The analysis also highlights the importance of scenario based testing using hands on metrics to quantify the notion of system risk.