Financial networks as directed cyclic graphs-draft

Abstract

Financial networks' study and understanding has become extremely important since the global financial meltdown in 2007 - 2009 when the inter-connectedness of institutions has surfaced as one of the major culprits for the magnitude of the distress. This paper aims at providing a new approach to describe and better understand the networks of institutions and their global properties. It is based on Directed Cyclic Graphs-a subset of Probabilistic Graphical Models which have already found use in other domains such as physics and computer science. The paper draws some parallels and contrasts with other studies in the field of Network Theory. It then concludes with a stylized example.