Better to stay apart: asset commonality, bipartite network centrality, and investment strategies

Andrea Flori (), Fabrizio Lillo (), Fabio Pammolli () and Alessandro Spelta ()
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Andrea Flori: Politecnico di Milano
Fabrizio Lillo: Center for Analysis, Decisions, and Society (CADS) - Human Technopole
Alessandro Spelta: Center for Analysis, Decisions, and Society (CADS) - Human Technopole

Annals of Operations Research, 2021, vol. 299, issue 1, No 10, 177-213

Abstract: Abstract By exploiting a bipartite network representation of the relationships between mutual funds and portfolio holdings, we propose an indicator that we derive from the analysis of the network, labelled the Average Commonality Coefficient (ACC), which measures how frequently the assets in the fund portfolio are present in the portfolios of the other funds of the market. This indicator reflects the investment behavior of funds’ managers as a function of the popularity of the assets they held. We show that ACC provides useful information to discriminate between funds investing in niche markets and those investing in more popular assets. More importantly, we find that ACC is able to provide indication on the performance of the funds. In particular, we find that funds investing in less popular assets generally outperform those investing in more popular financial instruments, even when correcting for standard factors. Moreover, funds with a low ACC have been less affected by the 2007–2008 global financial crisis, likely because less exposed to fire sales spillovers.

Keywords: Mutual funds; Bipartite network; Alpha persistence; Horse-race portfolios; Average commonality coefficient (search for similar items in EconPapers)
JEL-codes: C02 C6 G11 G23 (search for similar items in EconPapers)
Date: 2021
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Citations: View citations in EconPapers (2)

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Working Paper: Better to stay apart: asset commonality, bipartite network centrality, and investment strategies (2018)
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DOI: 10.1007/s10479-019-03277-0

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