Journal of Network Theory in Finance

Risk.net

Networks of common asset holdings: aggregation and measures of vulnerability

Anton Braverman and Andreea Minca

This paper quantifies the interrelations induced among financial institutions by common asset holdings. A network representation emerges in which nodes represent portfolios and edge weights aggregate the common asset holdings as well as the liquidity of these holdings. As a building block, we introduce a simple model of order imbalance that estimates price impacts caused by liquidity shocks. In our model, asset prices are set by a competitive risk-neutral market maker, and the arrival rates for buyers and sellers depend on the common asset holdings. We illustrate the relevance of our aggregation method and the resulting network representation using data on mutual fund asset holdings. We compare three related measures of vulnerability in the network and demonstrate a strong dependence between mutual fund returns and these measures.

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