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Better to stay apart: asset commonality, bipartite network centrality, and investment strategies

Author

Listed:
  • Andrea Flori

    (Politecnico di Milano)

  • Fabrizio Lillo

    (Center for Analysis, Decisions, and Society (CADS) - Human Technopole
    Università di Bologna)

  • Fabio Pammolli

    (Politecnico di Milano
    Center for Analysis, Decisions, and Society (CADS) - Human Technopole)

  • Alessandro Spelta

    (Center for Analysis, Decisions, and Society (CADS) - Human Technopole
    University of Pavia)

Abstract

By exploiting a bipartite network representation of the relationships between mutual funds and portfolio holdings, we propose an indicator that we derive from the analysis of the network, labelled the Average Commonality Coefficient (ACC), which measures how frequently the assets in the fund portfolio are present in the portfolios of the other funds of the market. This indicator reflects the investment behavior of funds’ managers as a function of the popularity of the assets they held. We show that ACC provides useful information to discriminate between funds investing in niche markets and those investing in more popular assets. More importantly, we find that ACC is able to provide indication on the performance of the funds. In particular, we find that funds investing in less popular assets generally outperform those investing in more popular financial instruments, even when correcting for standard factors. Moreover, funds with a low ACC have been less affected by the 2007–2008 global financial crisis, likely because less exposed to fire sales spillovers.

Suggested Citation

  • Andrea Flori & Fabrizio Lillo & Fabio Pammolli & Alessandro Spelta, 2021. "Better to stay apart: asset commonality, bipartite network centrality, and investment strategies," Annals of Operations Research, Springer, vol. 299(1), pages 177-213, April.
    • Handle: RePEc:spr:annopr:v:299:y:2021:i:1:d:10.1007_s10479-019-03277-0
    DOI: 10.1007/s10479-019-03277-0
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    More about this item

    Keywords

    Mutual funds; Bipartite network; Alpha persistence; Horse-race portfolios; Average commonality coefficient;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
    • C02 - Mathematical and Quantitative Methods - - General - - - Mathematical Economics
    • C6 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling

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