Network Science and Correlations in Financial Markets

During the last 20 Years Network Science has gained respect and ground on many fields, from Biology to Social Sciences. I think this kind of Science could improve the stability of Financial Markets as well. 

I am particularly concerned about the following interest chart provided by  Mr Jorda', Schularick and Taylor.

As you can see from the chart, the Correlation on Global Equity Markets have increased remarkably during the last 20 Years. This represent a big source of instability, in my opinion.

Nature has been way smarter than humans on creating resilient networks. 

For example on our Brains, Neurons are linked just (on the majority of cases) with their closer neighbor via synapses reducing the change of major disruption if one of them die or breaks down.

Another example is Ecology and Food Webs.

On the other side Humans Networks are more prone to error and we tend to create Hubs, which are nodes with many in-links. Think about airport Hubs in the United States or big Financial Institutions.

As you may have noticed, if an Hub breaks down, this has a major and cascading effect on a network.

On the Airport Example, think about the impact during last December about the big snowstorms affecting N.Y which caused major disruptions for Airlines.

On the Financial Sector, the failing of some major Hubs, i.e Financial Institutions, created a major crisis during the year 2008.

I don't think we are not in a better position now.  Big Banks, huge Firms (like Apple, Facebook etc), ETFs are the new hubs. If some of these Hubs will break down, we risk a cascading effect on the whole financial system.

I hope Network Science will make big progress in future in order to limit the risks posed by big hubs.