Journal of Network Theory in Finance

The quest for living beta: investigating the implications of shareholder networks

Matthew Oldham

  • The research provided in this paper adds to the literature that demonstrates the utility of employing network science to analyze financial markets.
  • By combining theories from network science, finance and ecology a new insight, which is that when a bipartite shareholder company network becomes too connected, the market may be susceptible to greater volatility; investor risk aversion can be identified through the temporal analysis of the networks, as investor moved into cash in times of distress or “bought the market” once risks subsided; and the use of the bipartite shareholder company network provides insight into the returns of the individual companies.

Network science is being increasingly utilized to assist in the search for causes of irregular behavior in financial markets. The search gained greater impetus after traditional finance theories were unable to predict the extent of the most recent global financial crisis. The increased abilities of researchers to access and manipulate data has also opened new avenues of investigation, including the discovery of key networks and the agents that interact within them. In this paper, an analysis of the temporal net- works formed between US institutional investors and Standard & Poor’s 500 stocks between 2007 and 2010 is presented, with the results identifying key relationships between the density of these networks and the movement of the market. The analysis also identified the changing behavior of investors, as their risk aversion varied ahead of the market’s price movements. To a lesser degree, relationships between the return of individual stocks and their investor networks are reported.

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