Network origins of portfolio risk

Abalfazl Zareei

Journal of Banking & Finance, 2019, vol. 109, issue C

Abstract: This paper shows that shocks, in the presence of asymmetric propagation structures, diminish investors’ diversification benefits. First, we construct an interdependency network with assets as nodes, and links corresponding to cross-dependency in returns. Second, we show that higher heterogeneity in the structure of the network increases portfolio risk. In particular, diversification among assets with star-like network structures, where a central asset cross-affects other assets in the portfolio, results in the lowest level of diversification benefits. Finally, we empirically demonstrate that two distinct datasets of U.S. industries and international stock markets greatly resemble star-like network structures.

Keywords: Portfolio diversification; Shock propagation; Cross-predictability; Centrality; Network analysis (search for similar items in EconPapers)
JEL-codes: B26 C58 G11 G14 N20 (search for similar items in EconPapers)
Date: 2019
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (5)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jbfina:v:109:y:2019:i:c:s0378426619302389

DOI: 10.1016/j.jbankfin.2019.105663

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