Networks in Finance: Foundations and Frontiers

Abstract

Networks in finance shape how value is created and how risks emerge, both systemic and systematic. We survey how different networks, including production, banking, director, and information networks, propagate micro shocks and transmit them to broader levels of aggregation. First, we synthesize the literature on the efficiency–stability trade-off governing systemic risk: Interconnections transmit gains, liquidity, and knowledge but create channels for contagion. Beyond the foundational focus on within-network transmission, we extend the discussion to across-network spillovers. Second, moving from systemic to systematic risk, we show how network topology drives the stochastic discount factor, affecting factors and expected returns. We also trace how networks form and evolve, dynamically generating new sources of risk. By adopting a macro perspective that unifies distinct networks into an overarching network of networks (meta-network), we focus on shared propagation mechanisms and outline directions for future research, including how networks may evolve with the rise of AI, intangibles, and deglobalization.