A Network Analysis of Information Diffusion in the Financial Sector
38 Pages Posted: 6 Feb 2020 Last revised: 5 Jan 2021
Date Written: January 9, 2020
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: Suggested Citation