The Topology of Overlapping Portfolio Networks

This paper analyzes the topology of the network of common asset holdings, where nodes represent managed portfolios and edge weights capture the impact of liquidations. Asset holdings data is extracted from the 13F filings. We consider the degree centrality as the degree in the subnetwork of weak links, where weak links are those that lead to significant liquidations. We explore the applications of this network representation to clustering and forecasting. To validate the weight attribution and the threshold used to define the weak links, we show that the degree centrality is correlated with excess returns, and is significant after we control for the Carhart four factors. The network of weak links has a scale free structure, similar to financial networks of balance sheet exposures. Moreover, a small number of clusters, densely linked, concentrate a significant proportion of the portfolios.

[1]  Peter Tufano,et al.  Costly Search and Mutual Fund Flows , 1998 .

[2]  R. Cont,et al.  Institutional Investors and the Dependence Structure of Asset Returns , 2014 .

[3]  T. Aste,et al.  A Counterparty Risk Study of UK Banking Systems , 2015 .

[4]  Massimo Massa,et al.  Hedge Fund Stock Trading in the Financial Crisis of 2007-2008 , 2010 .

[5]  When Do Creditors with Heterogeneous Beliefs Agree to Run? , 2013 .

[6]  Andreea Minca,et al.  Networks of Common Asset Holdings: Aggregation and Measures of Vulnerability , 2014 .

[7]  Rama Cont,et al.  RESILIENCE TO CONTAGION IN FINANCIAL NETWORKS , 2010, 1112.5687.

[8]  Mark E. J. Newman,et al.  The Structure and Function of Complex Networks , 2003, SIAM Rev..

[9]  C. Granger,et al.  Spurious regressions in econometrics , 1974 .

[10]  Morten L. Bech,et al.  The Topology of the Federal Funds Market , 2008, SSRN Electronic Journal.

[11]  Wolf Wagner,et al.  Diversification at Financial Institutions and Systemic Crises , 2010 .

[12]  Andrey Krishenik,et al.  When do creditors with heterogeneous beliefs agree to run? , 2015, Finance Stochastics.

[13]  Camelia Minoiu,et al.  A Network Analysis of Global Banking: 1978-2010 , 2011, SSRN Electronic Journal.

[14]  E. Fama,et al.  Common risk factors in the returns on stocks and bonds , 1993 .

[15]  Ronnie Sadka,et al.  Liquidity Risk and the Cross-Section of Hedge-Fund Returns , 2009 .

[16]  Edson Bastos e Santos,et al.  Network Structure and Systemic Risk in Banking Systems , 2010 .

[17]  G. Maddala,et al.  A Comparative Study of Unit Root Tests with Panel Data and a New Simple Test , 1999 .

[18]  E. David,et al.  Networks, Crowds, and Markets: Reasoning about a Highly Connected World , 2010 .

[19]  Y. Amihud,et al.  Illiquidity and Stock Returns: Cross-Section and Time-Series Effects , 2000 .

[20]  Rama Cont,et al.  Stress Testing the Resilience of Financial Networks , 2010 .

[21]  Itzhak Ben-David,et al.  Hedge Fund Stock Trading in the Financial Crisis of 2007-2009 , 2011 .

[22]  Byungnam Kahng,et al.  Weighted Scale-Free Network in Financial Correlations , 2002 .

[23]  Edson Bastos e Santos,et al.  Handbook on Systemic Risk: Network Structure and Systemic Risk in Banking Systems , 2013 .

[24]  V. Muggeo.  Estimating regression models with unknown break‐points , 2003, Statistics in medicine.

[25]  Chris Arney,et al.  Networks, Crowds, and Markets: Reasoning about a Highly Connected World (Easley, D. and Kleinberg, J.; 2010) [Book Review] , 2013, IEEE Technology and Society Magazine.

[26]  David Thesmar,et al.  Vulnerable Banks , 2011 .

[27]  Hamed Amini,et al.  Inhomogeneous Financial Networks and Contagious Links , 2014, Oper. Res..

[28]  M E J Newman,et al.  Modularity and community structure in networks. , 2006, Proceedings of the National Academy of Sciences of the United States of America.

[29]  Michael Boss,et al.  Network topology of the interbank market , 2003, cond-mat/0309582.

[30]  Albert S. Kyle,et al.  Market Microstructure Invariants: Empirical Evidence from Portfolio Transitions , 2011 .

[31]  T. Eisenbach,et al.  Fire-sale Spillovers and Systemic Risk , 2015, The Journal of Finance.

[32]  T. Ramadorai,et al.  Asset Fire Sales and Purchases and the International Transmission of Funding Shocks , 2012 .

[33]  R. Cont,et al.  RUNNING FOR THE EXIT: DISTRESSED SELLING AND ENDOGENOUS CORRELATION IN FINANCIAL MARKETS , 2011 .

[34]  F. Caccioli,et al.  Stability analysis of financial contagion due to overlapping portfolios , 2014 .

[35]  David A. Hsieh,et al.  Extracting Portable Alphas From Equity Long-Short Hedge Funds , 2004 .

[36]  Sheridan Titman,et al.  On Persistence in Mutual Fund Performance , 1997 .

[37]  My T. Thai,et al.  Community Detection in Scale-Free Networks: Approximation Algorithms for Maximizing Modularity , 2013, IEEE Journal on Selected Areas in Communications.

[38]  Javier A. Reyes,et al.  A Network Analysis of Global Banking:1978-2009 , 2011 .

[39]  Cristopher Moore,et al.  Stability Analysis of Financial Contagion Due to Overlapping Portfolios , 2012, ArXiv.

[40]  M. Muggeo,et al.  segmented: An R package to Fit Regression Models with Broken-Line Relationships , 2008 .

[41]  Joshua D. Coval,et al.  Asset Fire Sales (and Purchases) in Equity Markets , 2005 .

[42]  Victoria J. Rati.  Hedge Fund Stock Trading in the Financial Crisis of 2007–2009 , 2012 .