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A Psychophysics Paradigm for the Collection and Analysis of Similarity Judgments
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Systemic risk from investment similarities.
Danilo Delpini1,2, Stefano Battiston3, Guido Caldarelli2,4
1Dept. of Economics and Business, Università degli Studi di Sassari, Sassari, Italy.
Plos One
|May 24, 2019
Summary
Network analysis reveals that US mutual fund portfolios became more diversified and less similar during the Global Financial Crisis. However, significant investment overlap persists, indicating correlated strategies and ongoing systemic risk.
Area of Science:
- Financial economics
- Network science
- Quantitative finance
Background:
- Network theory offers powerful tools for analyzing complex financial systems.
- Understanding investment portfolio structure, including asset correlation and overlap, is crucial for assessing investor risk.
- The Global Financial Crisis highlighted the interconnectedness and systemic risks within financial markets.
Purpose of the Study:
- To investigate the evolution of US mutual fund portfolios during the Global Financial Crisis using network analysis.
- To quantify changes in portfolio diversification and investment similarity among funds.
- To identify systemic risk components arising from shared investment strategies.
Main Methods:
- Construction and analysis of a bipartite network representing US mutual funds and their assets.
- Tracking network evolution over the period of the Global Financial Crisis.
- Employing a simplified shock propagation model to assess systemic risk.
Main Results:
- On average, mutual fund portfolios exhibited increased diversification and decreased similarity during the crisis.
- A significant overlap in investments was observed, exceeding random allocation benchmarks, suggesting correlated fund strategies.
- A systemic risk component was identified, linked to portfolio similarity, which leaves the network vulnerable post-crisis.
Conclusions:
- Despite increased diversification, correlated investment strategies among mutual funds contribute to systemic risk.
- Both diversification and similarity metrics are essential for a comprehensive assessment of systemic risk in financial networks.
- Network analysis provides valuable insights into financial system dynamics and risk management.
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