relation: http://eprints.imtlucca.it/3861/
title: The Network of U.S. Mutual Fund Investments: Diversification, Similarity and Fragility throughout the  Global Financial Crisis
creator: Delpini, Danilo
creator: Battiston, Stefano
creator: Caldarelli, Guido
creator: Riccaboni, Massimo
subject: HA Statistics
subject: HB Economic Theory
subject: HG Finance
description: Network theory proved recently to be useful in the quantification of many properties of financial systems. The analysis of the structure of investment portfolios is a major application since their eventual correlation and overlap impact the actual risk diversification by individual investors. We   nvestigate the bipartite network of US mutual fund portfolios and their assets. We follow its evolution during the Global Financial Crisis and analyse the interplay between diversification, as understood in classical portfolio theory, and similarity of the investments of different funds. We show that, on average, portfolios have become more diversified and less similar during the crisis. However, we also find that large overlap is far more likely than expected from models of random allocation of investments. This indicates the existence of strong correlations between fund portfolio strategies. We introduce a simplified model of propagation of financial shocks, that we exploit to show that a systemic risk component origins from the similarity of portfolios. The network is still vulnerable after crisis because of this effect, despite the increase in the diversification of portfolios. Our results indicate that diversification may even increase systemic risk when funds diversify in the same way. Diversification and similarity can play antagonistic roles and the trade-off between the two should be taken into account to properly assess systemic risk.
publisher: arXiv
date: 2018
type: Working Paper
type: NonPeerReviewed
format: application/pdf
language: en
rights: cc_by_nc
identifier: http://eprints.imtlucca.it/3861/1/1801.02205.pdf
identifier:   Delpini, Danilo and Battiston, Stefano and Caldarelli, Guido and Riccaboni, Massimo  The Network of U.S. Mutual Fund Investments: Diversification, Similarity and Fragility throughout the Global Financial Crisis.  Working Paper   arXiv       (Submitted)   
relation: https://arxiv.org/abs/1801.02205
relation: arXiv:1801.02205