Trade fragmentation and volatility-of-volatility networks

Cécile Bastidon () and Fredj Jawadi

Journal of International Financial Markets, Institutions and Money, 2024, vol. 91, issue C

Abstract: We assess the impact of trade fragmentation in equity markets using volatility networks following the volatility-of-volatility (VoV) approach. VoV networks offer an original method for measuring and visualizing the common component of volatilities. We use topological distance and connectivity indicators describing their structure as alternative proxies of VoV. Further, we use panel tests to apply threshold effects regression models on French equity market data after the introduction of MiFID, both at portfolio level and asset level. We show that market fragmentation yields a reduction in VoV, corresponding to both a contraction of volatility networks and a change in their structure. This effect strengthens in the stabilizing fragmentation regime compared to the increased fragmentation regime. Since VoV has been shown to predict stock markets returns, this original finding is widely relevant to market operators, regulators and public authorities.

Keywords: Financial networks; Market microstructure; Volatility-of-volatility; Non-linearity; Threshold models; MiFID; RegNMS; Trades fragmentation (search for similar items in EconPapers)
JEL-codes: C65 G12 G14 G18 (search for similar items in EconPapers)
Date: 2024
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Working Paper: Trade fragmentation and volatility-of-volatility networks (2024)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:intfin:v:91:y:2024:i:c:s1042443123001762

DOI: 10.1016/j.intfin.2023.101908

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