Systemic Risk and Network Dynamics

Overview

Systemic risk describes the likelihood of an entire system breaking down—a situation caused by cascades of failures in the networks that make up the system. Knowledge of such risk can be invaluable. The global economic crisis brought to light the importance of understanding how disturbances spread through financial systems, for example. Epidemics of infectious diseases and the spread of forest fires also illustrate the underlying principals, and importance, of systemic risk.

Crucially, although all systems have unique characteristics, they also share common features. This project will draw together these commonalities to create a general framework for analyzing systemic risk. Once this framework is in place it can be used to assess and reduce risks in a diverse array of applications.

IIASA research

This cross-cutting project aims to develop methods to measure and reduce systemic risk and to provide tools to assess the potential for system collapse, even under uncertainty. This is vital because situations in which specifics about a network’s dynamics are unknown are common in the real world. The researchers will also investigate techniques for guiding the system back to normal after a cascade of failures.

The project will assess risk in ecological systems (under the IIASA Evolution and Ecology program), financial systems (under the Advanced Systems Analysis program), and the global insurance system (under the Risk, Policy and Vulnerability program).

Specifically, three case studies will be examined in depth:

• Food webs. As biodiversity declines, we need to understand how species loss will affect ecosystem functioning. Using real-world food-web data, the researchers will analyze under what conditions species loss can set off a cascade of subsequent extinctions.
• Financial crises. As financial systems become increasingly complex and interconnected there is a recognized need for early warnings of systemic failures, even under conditions of high uncertainty.
• Global insurance and climate-change risks. As climate change progresses and climate-related disasters become more common, there is a need ensure robust insurance for cascading failures to allow households, towns and countries to recover from such events.