The topology of overlapping portfolio networks
-
Weilong Guo
and
Li Wang
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. Asset holdings data is extracted from the 13F filings. 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.
Acknowledgements
The second author would like to thank IPAM for their hospitality during the program “Broad Perspective and New Directions in Financial Mathematics”, when she accomplished part of this work. We would like to thank Eric Schaanning and the anonymous referee for comments which helped us improve the paper.
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