Probabilistic Financial Community Models with Latent Dirichlet Allocation for Financial Supply Chains

Abstract

There is a growing interest in modeling and predicting the behavior of financial systems and supply chains. In this paper, we focus on the the analysis of the resMBS supply chain; it is associated with the US residential mortgage backed securities and subprime mortgages that were critical in the 2008 US financial crisis. We develop models based on financial institutions (FI), and their participation described by their roles (Role) on financial contracts (FC). Our models are based on an intuitive assumption that FIs will form communities within an FC, and FIs within a community are more likely to collaborate with other FIs in that community, and play the same role, in another FC. Inspired by the Latent Dirichlet Allocation (LDA) and topic models, we develop two probabilistic financial community models. In FI-Comm, each FC (document) is a mix of topics where a topic is a distribution over FIs (words). In Role-FI-Comm, each topic is a distribution over Role-FI pairs (words). Experimental results over 5000+ financial prospecti demonstrate the effectiveness of our models.