Concentration Risk

Summary

There are dozens upon dozes of indices that aim to measure concentration risk (and related concepts such as diversity or inequality). Why such a proliferation of alternatives? There are multiple reasons, which we will attempt to identify in this post. This enumeration prompts us to dig deeper into the nature of concentration indices and their various pros and cons.

Summary

We imagine the random propagation of money flows through simplified economic networks as a sequence of monetary transactions following a stochastic process. We follow the journey of a cash amount. Whenever a transaction in this chain implies an environmental impact, that impact is recorded and cumulated. Computing the expected outcome of such flows reproduces the standard results of environmentally extended input-output models. The random walk interpretation allows the computation of various additional statistical properties, one example being estimating a variance of environmental impact or intrinsic uncertainty around the central estimate. We interpret this uncertainty as being a concentration risk measure.

What are ActivityPub Networks?

ActivityPub is a technical specification towards decentralized (more precisely, federated) social networking (termed the Fediverse) based upon the exchange of ActivityStreams messages that follow the Activity Vocabulary. The ActivityPub proposal has been standardized and published by the W3C and has motivated the design of several federated social networking systems.

Modeling economic networks and their dynamics

Economic networks are the primary abstractions though which we can conceptualize the state (condition) and evolution of economic interactions. This simply reflects the fact that human economies are quite fundamentally systems of interacting actors (or nodes in a network) with transient or more permanent relations between them.

Open Risk White Paper 10: Connecting the Dots: Concentration, diversity, inequality and sparsity in economic networks

In this second Open Risk White Paper on Connecting the Dots we examine measures of concentration, diversity, inequality and sparsity in the context of economic systems represented as network (graph) structures. We adopt a stylized description of economies as property graphs and illustrate how relevant concepts can be represented in this language. We explore in some detail data types representing economic network data and their statistical nature which is critical in their use in concentration analysis. We proceed to recast various known indexes drawn from distinct disciplines in a unified computational context.

Concentration, diversity, inequality and sparsity in the context of economic networks

In this second Open Risk White Paper on Connecting the Dots we examine measures of concentration, diversity, inequality and sparsity in the context of economic systems represented as network (graph) structures. We adopt a stylized description of economies as property graphs and illustrate how relevant concepts can represent in this language. We explore in some detail data types representing economic network data and their statistical nature which is critical in their use in concentration analysis. We proceed to recast various known indexes drawn from distinct disciplines in a unified computational context.

Visualizing a year in lockdowns and restricted mobility

As we move into February 2021 the world will be experiencing almost a year under pandemic conditions. This has markedly changed behavioral patterns of human mobility across the board. One major difference with previous pandemics is that through the use of a variety of digital technologies and new data collection channels we know have an unprecedented view of those changing mobility patterns.

Constructing a Global Mobility Index (GMI)

In previous posts (here, and here) we introduced new Open Risk Dashboard functionalities that integrate COVID-19 community mobility data (currently focusing on the datasets provided by Google).

As a reminder, these reports chart over time human mobility trends collected from mobile geolocation data. The granularity is by geography and across different categories of places / activities such as retail and recreation areas, groceries and pharmacies, parks, transit stations, workplaces, and residential areas. Through these data sets we have available (for the first time in history) an overall quantitative view of global mobility (and Mobility Risk )!

The community mobility reports and OpenCPM

In a previous post we introduced new OpenCPM functionality that integrates COVID-19 community mobility data (currently from Google). The reports chart movement trends over time by geography, across different categories of places such as retail and recreation, groceries and pharmacies, parks, transit stations, workplaces, and residential.

The community mobility reports and OpenCPM

As the COVID-19 pandemic unfolded technology providers (most notably Google and Apple) made available to the public aggregated and anonymized data about human mobility in the crisis period (on the basis of smartphone location data). These Community Mobility Reports provide insights into how mobility patterns changed in response both to pandemic news and policies aimed at combating COVID-19.

Limit frameworks are fundamental tools for risk management

A Limit Framework is a set of policies used by financial institutions (or other firms that actively assume quantifiable risks) to govern in a quantitative manner the maximum risk exposure permitted for an individual, trading desk, business line etc.

Release of version 0.4 of the Concentration Library adds Geographic / Industrial concentration indexes

Further building out the OpenCPM set of tools, we release version 0.4 of the Concentration Library, a python library for the computation of various concentration, diversification and inequality indices.

Release of version 0.3 of the ConcentrationMetrics Library

Further building out the OpenCPM set of tools, we release version 0.3 of the ConcentrationMetrics Library. This python library for the computation of various concentration, diversification and inequality indices.

The below list provides documentation URL’s for each one of the implemented indexes

Top 10 Risk Manual Articles

The current list of Top 10 Risk Manual Articles, sorted by reader popularity covers a range of topics in risk management.

Open Risk White Paper 4: Open Risk Model Taxonomy

We develop a taxonomy for risk models that aims to support an open source risk models framework. The proposal builds on and extends some commonly used risk taxonomies within financial services firms but introduces some significant new elements. We first review the motivation for risk taxonomies, the concepts and tools that are involved and some weaknesses of current schemes. We try also to clarify the link between risk models and risk taxonomies.

Resources fo Concentration Risk Management

Concentration Risk Management is a staple of risk management. Open Risk developed a unique and novel set of risk management resources to assist with building in-house knowledge for managing credit concentration risks.

Resources range from courses and online manuals to open source calculators and mobile eLearning games. In this post we have a brief summary of what is available, you can find more details by clicking on the embedded links

Revisiting simple concentration indexes

Our white paper Revisiting simple concentration indexes reviews the definitions of widely used concentration metrics such as the concentration ratio, the HHI index and the Gini and clarify their meaning and relationships.

Open Risk White Paper 1: Revisiting Simple Concentration Indexes

We review the definitions of widely used concentration metrics such as the concentration ratio, the HHI index and the Gini and clarify their meaning and relationships. This new analytic framework helps clarify the apparent arbitrariness of simple concentration indexes and brings to the fore the underlying unifying concept behind these metrics, thereby enabling their more informed use in portfolio and risk management applications. We also propose that the sensitivity of concentration indexes to growing concentration should be a defining criterion for adopting an index and explore the sensitivity of common indexes to changing portfolio concentrations. We show that this sensitivity can vary significantly between indexes for parametric families of portfolio distributions and hence selecting and using a simple concentration index should take this aspect carefully into consideration

Concentrating on Concentration Risk

Senior economists such as Ben Bernanke were still studying the Great 30s Depression when the financial crisis struck in full force circa 2007. Given the complexity of the modern economic and financial landscape compared to the blessed good old days - we have no reports of FWMD (financial weapons of mass destruction) from back then - we can reasonably project that economists will be studying and pontificating on causes and remedies for the current crisis for the next 100 years or so.

FuriousBanker(TM) helps you learn risk management concepts in a fun and engaging way. This educational game series for mobiles and tablets is developed by Open Risk to enable modern interactive elearning for people working (or aspiring to work) in financial risk management.

The first episode sees FuriousBanker facing The credit detox challenge: