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Dynamics of financial markets and transaction costs: A graph-based study

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  • Lillo, Felipe
  • Valdés, Rodrigo

Abstract

In financial markets, trading patterns influence the behaviour of arbitrage, surveillance, risk management and pricing returns. The analysis of these patterns is important for defining policies in financial regulation as well as portfolios of international assets. Using financialization as a conceptual framework to understand the current trading patterns of financial markets, this work employs a market graph model for studying the stock indexes of geographically separated financial markets. By using an edge creation condition based on a transaction cost threshold, the resulting market graph features a strong connectivity, some traces of a power law in the degree distribution and an intensive presence of cliques. Furthermore, an inverse relation between transaction costs and maximal clique size is noticed. The market graph model also indicates that infrastructure, sustainability and commodity indexes from APEC, EU and NAFTA affect the behaviour of markets. As a result, the graph approach shows a consistent set of outcomes that mostly explain the financialization dynamics of markets.

Suggested Citation

  • Lillo, Felipe & Valdés, Rodrigo, 2016. "Dynamics of financial markets and transaction costs: A graph-based study," Research in International Business and Finance, Elsevier, vol. 38(C), pages 455-465.
    • Handle: RePEc:eee:riibaf:v:38:y:2016:i:c:p:455-465
    DOI: 10.1016/j.ribaf.2016.07.024
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    More about this item

    Keywords

    Financial networks; Market graph; Financialization; Transaction cost;
    All these keywords.

    JEL classification:

    • C65 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Miscellaneous Mathematical Tools
    • G1 - Financial Economics - - General Financial Markets
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation

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