Due to the interconnectedness of financial entities, estimating certain key properties of a complex financial system, including the implied level of systemic risk, requires detailed information about the structure of the underlying network of dependencies. However, since data about financial linkages are typically subject to confidentiality, network reconstruction techniques become necessary to infer both the presence of connections and their intensity. Recently, several 'horse races' have been conducted to compare the performance of the available financial network reconstruction methods. These comparisons were based on arbitrarily chosen metrics of similarity between the real network and its reconstructed versions. Here we establish a generalized maximum-likelihood approach to rigorously define and compare weighted reconstruction methods. Our generalization uses the maximization of a certain conditional entropy to solve the problem represented by the fact that the density-dependent constraints required to reliably reconstruct the network are typically unobserved and, therefore, cannot enter directly, as sufficient statistics, in the likelihood function. The resulting approach admits as input any reconstruction method for the purely binary topology and, conditionally on the latter, exploits the available partial information to infer link weights. We find that the most reliable method is obtained by 'dressing' the best-performing binary method with an exponential distribution of link weights having a properly density-corrected and link-specific mean value and propose two safe (i.e. unbiased in the sense of maximum conditional entropy) variants of it. While the one named CReM A is perfectly general (as a particular case, it can place optimal weights on a network if the bare topology is known), the one named CReM B is recommended both in case of full uncertainty about the network topology and if the existence of some links is certain. In these cases, the CReM B is faster and reproduces empirical networks with highest generalized likelihood among the considered competing models.

A faster horse on a safer trail: generalized inference for the efficient reconstruction of weighted networks

Federica Parisi;Tiziano Squartini
;
Diego Garlaschelli
2020

Abstract

Due to the interconnectedness of financial entities, estimating certain key properties of a complex financial system, including the implied level of systemic risk, requires detailed information about the structure of the underlying network of dependencies. However, since data about financial linkages are typically subject to confidentiality, network reconstruction techniques become necessary to infer both the presence of connections and their intensity. Recently, several 'horse races' have been conducted to compare the performance of the available financial network reconstruction methods. These comparisons were based on arbitrarily chosen metrics of similarity between the real network and its reconstructed versions. Here we establish a generalized maximum-likelihood approach to rigorously define and compare weighted reconstruction methods. Our generalization uses the maximization of a certain conditional entropy to solve the problem represented by the fact that the density-dependent constraints required to reliably reconstruct the network are typically unobserved and, therefore, cannot enter directly, as sufficient statistics, in the likelihood function. The resulting approach admits as input any reconstruction method for the purely binary topology and, conditionally on the latter, exploits the available partial information to infer link weights. We find that the most reliable method is obtained by 'dressing' the best-performing binary method with an exponential distribution of link weights having a properly density-corrected and link-specific mean value and propose two safe (i.e. unbiased in the sense of maximum conditional entropy) variants of it. While the one named CReM A is perfectly general (as a particular case, it can place optimal weights on a network if the bare topology is known), the one named CReM B is recommended both in case of full uncertainty about the network topology and if the existence of some links is certain. In these cases, the CReM B is faster and reproduces empirical networks with highest generalized likelihood among the considered competing models.
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Utilizza questo identificativo per citare o creare un link a questo documento: http://hdl.handle.net/20.500.11771/16821
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