Output-Only Identification and Spectral Monitoring of Coupled Feedback Networks with Known Time-Varying Actuation
Finding hidden connections in financial networks when you can only see the outputs
When financial systems like leveraged funds automatically rebalance their portfolios, they create feedback loops that ripple across markets—but those ripples are hard to measure because traders can't directly observe how each connection works. This paper shows how to map those hidden connections using only public information (like fund disclosures) and observed market movements, even without access to the internal trading signals. The method works by exploiting the predictable patterns created when rebalancing rules change over time.
Financial regulators and risk managers need to understand how feedback loops between funds, exchanges, and other market participants could amplify market stress or trigger cascading failures. This technique lets them reconstruct those hidden networks from public data alone, making it possible to spot dangerous feedback loops before they destabilize markets—without requiring firms to disclose their internal trading rules.