Australasian Science: Australia's authority on science since 1938

Following the Money Trail

By Stephen Luntz

Astrophysics and banking have a lot more in common than you’d ever imagine.

If the Global Financial Crisis made you think that most economists have no idea whether our banking systems are stable or not, do not despair. Hope may be at hand, but it comes not from economists but from physicists.

Dr Andrey Sokolov was awarded his doctorate for studies of the jets from supermassive black holes at the centres of galaxies. However, he’s now doing a second PhD thesis on the stability of the Australian banking system. The results are far from complete, but an initial paper was published last year in The European Physical Journal.

“We’re not trying to model the whole economy,” Sokolov says. “That’s an impossible problem.” Consequently he doesn’t think his research would have been able to prevent something as large as the global financial crisis. Instead he is looking at the flow of money between the Reserve Bank of Australia (RBA), 54 Australian banks and overseas financial institutions.

The research only looks at these large-scale immediate interactions, not the small consumers frustrated by debits appearing in their account immediately while credits take days.

“When you look at a dynamical system,” Sokolov says, “you could have a different types of behaviour. It could be in equilibrium, or cyclical, or it could be unstable; that is, it could grow or decline to zero.”

One of the goals was to set up a simulation to establish the properties that create one of these behaviours. “One possible behaviour of an unstable system is a crash when something happens in the system and it moves further and further away from equilibrium.”

Sokolov and his colleagues are still thinking about ways to set up this simulation, so any output is a long way away. However, he thinks it will eventually be of great interest to policy-makers. “The RBA want the system to be as stable as possible, but don’t want to impose too strict constraints on it, so one goal we want to achieve is to assist with policy recommendations on the balance of regulations.”

Many leading economists have a background in physics, including Jan Tinbergen who won the first Nobel Prize for economics. However, the field known as econophysics arose in the mid-1990s when physicists began to use the tools they had developed for modelling complex systems, such as weather, to economic problems.

However, Sokolov says that “most efforts have been directed towards analysing financial markets”. Wealth exchange has also been popular but money flows between banks has not had the same attention, largely because the data have been difficult to obtain.

Sokolov was only able to do his work because his colleagues used contacts in the RBA to present their case as to why their research would be valuable, eventually obtaining information on money flows between Australian banks for February 2007.

The work is a new direction for Sokolov as he “wanted to become an astronomer from the very beginning”. This led to undergraduate studies at St Petersburg State University, where he modelled the dynamics of the interstellar medium in a giant elliptical galaxy.

“This is an open system with sources and sinks of mass,” says Sokolov. “It can show complex behaviour. The basic properties are temperature and density as a function of time. If you change the properties – for example a little bit more influx of mass –the system can change dramatically. Instability can lead to star formation. All this is very important for understanding the evolution of galaxies.”

Sokolov’s PhD at the University of Boston simulated the shockwaves in the jets of material that stream out of black holes at the centre of galaxies. These can also trigger star formation, as well as producing flares. “You can study the flares to understand the jets,” says Sokolov. The jets in turn give us clues about the black holes, which cannot be observed directly.

For his postdoc Sokolov decided he wanted to move on from simulations to do some data analysis, so he looked at the radio emissions from the galaxy BL Lac. He was trying to detect whether the galaxy’s jets were precessing, changing direction or stable. He concluded that even though the data were from a very long baseline array of radio telescopes, they lacked the detail required. Although he got no result, his research indicated what data would be needed in future to answer the question. “That’s how science advances,” he says.

While in England, Sokolov decided he wanted to come to Australia, despite never having been here, and he is now based in the astrophysics department at the University of Melbourne. Here, he says, “we decided to look into banking because it is an interesting problem, a complex system we could examine as physicists, not economists”.