Information Networks in the Financial Sector and Systemic Risk

43 Pages Posted: 6 Feb 2020 Last revised: 15 Oct 2021

See all articles by Paul Borochin

Paul Borochin

University of Miami - Department of Finance

Stephen Rush

Bowling Green State University - Department of Finance; Vietnam National University - Ho Chi Minh City (VNU-HCM) - University of Economics and Law

Date Written: January 9, 2020

Abstract

We create and test two novel network-based measures of interconnectedness in the financial industry during 1996 to 2013. A network based on informed trading in financial firms predicts firm-specific risk and performance, while one formed on financial firm returns predicts future macroeconomic risk. The measure of informed trading is robust to variable order arrival rates more common in modern algorithmic trading. A trading strategy based on informed trading network centrality in the financial sector delivers an annualized risk-adjusted return of 7.73%. This risk-adjusted return shows that the network centrality has an economic impact that is relevant beyond the statistical results of the paper.

Keywords: Asset Pricing, Network Analysis, VPIN, Systemic Risk

JEL Classification: G12, G14, C55, G20

Suggested Citation

Borochin, Paul and Rush, Stephen, Information Networks in the Financial Sector and Systemic Risk (January 9, 2020). University of Miami Business School Research Paper No. 3516784, Journal of Banking and Finance, Forthcoming, Available at SSRN: https://ssrn.com/abstract=3516784 or http://dx.doi.org/10.2139/ssrn.3516784

Paul Borochin (Contact Author)

University of Miami - Department of Finance ( email )

P.O. Box 248094
Coral Gables, FL 33124-6552
United States

Stephen Rush

Bowling Green State University - Department of Finance ( email )

212 Business Administration
Bowling Green, OH 43403
United States

HOME PAGE: http://bgsu.edu

Vietnam National University - Ho Chi Minh City (VNU-HCM) - University of Economics and Law ( email )

Vietnam National University - Ho Chi Minh City
Linh Xuan Ward, Thu Duc
Ho Chi Minh City
Vietnam

HOME PAGE: http://uel.edu.vn

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