The topology of overlapping portfolio networks

Guo Weilong (), Minca Andreea () and Wang Li ()
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Guo Weilong: School of Operations Research and Information Engineering, Cornell University, Ithaca, NY 14850, United States of America
Minca Andreea: School of Operations Research and Information Engineering, Cornell University,Ithaca, NY 14850, United States of America
Wang Li: Operations Research Center, Massachusetts Institute of Technology, Cambridge, MA 02139, United States of America

Statistics & Risk Modeling, 2016, vol. 33, issue 3-4, 139-155

Abstract: 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.

Keywords: Financial network; fund portfolios; vulnerability; centrality; forecasting; graph clustering (search for similar items in EconPapers)
Date: 2016
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DOI: 10.1515/strm-2015-0020

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