The Topology of Overlapping Portfolio Networks

22 Pages Posted: 18 Jun 2015

See all articles by Weilong Guo

Weilong Guo

Cornell University

Andreea Minca

Cornell University

Li Wang

Massachusetts Institute of Technology (MIT) - Operations Research Center

Date Written: June 16, 2015

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. 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

Suggested Citation

Guo, Weilong and Minca, Andreea and Wang, Li, The Topology of Overlapping Portfolio Networks (June 16, 2015). Available at SSRN: https://ssrn.com/abstract=2619514 or http://dx.doi.org/10.2139/ssrn.2619514

Weilong Guo

Cornell University ( email )

Ithaca, NY 14853
United States

Andreea Minca (Contact Author)

Cornell University ( email )

222 Rhodes Hall
Ithaca, NY NY 14853
United States

HOME PAGE: http://people.orie.cornell.edu/acm299/

Li Wang

Massachusetts Institute of Technology (MIT) - Operations Research Center ( email )

77 Massachusetts Avenue
Bldg. E40-103
Cambridge, MA 02139
United States

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