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Which stocks are profitable? A network method to investigate the effects of network structure on stock returns

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  • Chen, Kun
  • Luo, Peng
  • Sun, Bianxia
  • Wang, Huaiqing

Abstract

According to asset pricing theory, a stock’s expected returns are determined by its exposure to systematic risk. In this paper, we propose a new method for analyzing the interaction effects among industries and stocks on stock returns. We construct a complex network based on correlations of abnormal stock returns and use centrality and modularity, two popular measures in social science, to determine the effect of interconnections on industry and stock returns. Supported by previous studies, our findings indicate that a relationship exists between inter-industry closeness and industry returns and between stock centrality and stock returns. The theoretical and practical contributions of these findings are discussed.

Suggested Citation

  • Chen, Kun & Luo, Peng & Sun, Bianxia & Wang, Huaiqing, 2015. "Which stocks are profitable? A network method to investigate the effects of network structure on stock returns," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 436(C), pages 224-235.
    • Handle: RePEc:eee:phsmap:v:436:y:2015:i:c:p:224-235
    DOI: 10.1016/j.physa.2015.05.047
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