Multi-Scale Network Dynamics and Systemic Risk: A Model Context Protocol Approach to Financial Markets

Paper: arXiv 2507.08065

Authors: Avishek Bhandari

Abstract

This paper introduces a novel framework for analyzing systemic risk in financial markets through multi-scale network dynamics using Model Context Protocol (MCP) for agent communication. We develop an integrated approach that combines transfer entropy networks, agent-based modeling, and wavelet decomposition to capture information flows across temporal scales implemented in the MCPFM (Model Context Protocol Financial Markets) R package. Our methodology enables heterogeneous financial agents including high-frequency traders, market makers, institutional investors, and regulators to communicate through structured protocols while maintaining realistic market microstructure. The empirical analysis demonstrates that our multi-scale approach reveals previously hidden systemic risk patterns, with the proposed systemic risk index achieving superior early warning capabilities compared to traditional measures. The framework provides new insights for macroprudential policy design and regulatory intervention strategies. The complete implementation is available as an open-source R package at https://github.com/avishekb9/MCPFM to facilitate reproducible research and practical applications.

Complexity vs Empirical Score

• Math Complexity: 6.5/10
• Empirical Rigor: 7.0/10
• Quadrant: Holy Grail — high math complexity, high empirical rigor

Why this score: This paper presents an innovative integration of the Model Context Protocol (MCP) with agent-based modeling, transfer entropy, and multi-scale wavelet decomposition for financial systemic risk assessment. It offers strong mathematical formalization alongside an open-source R package implementation that significantly enhances reproducibility.

Research Flowchart

  flowchart TD
    A[Research Goal: Capture Multi-Scale Systemic Risk via MCP Agent Framework] --> B[Data Inputs: High-Frequency & Cross-Asset Market Data]
    B --> C[Methodology: Wavelet Decomposition & Transfer Entropy]
    C --> D[Computational Core: MCPFM R Package & Agent-Based Modeling]
    D --> E[Key Outcomes: Early Warning Risk Index & Macroprudential Policy Tools]