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Are Networks Priced? Network Topology and Order Trading Strategies in High Liquidity Markets

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Author Info

  • Ethan Cohen-Cole

    (University of Maryland - College Park)

  • Andrei Kirilenko

    (Commodity Futures Trading Commission)

  • Eleonora Patacchini

    (University of Rome "La Sapienza")

Abstract

Network spillovers explain as much as 90% of the individual variation in returns in a fully electronic market. We study two fully electronic, highly liquid markets, the Dow an S&P 500 e-mini futures markets. Within these markets, we use a unique dataset of realized trades that includes the precise topology of transactions; this topology allows us to identify precisely both the relevance of network structure as well as endogenous network spillovers. Within these markets, we will show that network positioning on the part of trader leads to remarkable spillovers in return. Empirically, we estimate that the implied average multiplier, the ratio of a individual level shock to the total network one, is as large as 20. A gain of $1 for a trader leads to an average of $20 in gains for all traders and much more for connected ones. In a zero-sum market, such as the one in this study, this suggests a very large re-allocation of returns according to network structure.

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Bibliographic Info

Paper provided by Einaudi Institute for Economics and Finance (EIEF) in its series EIEF Working Papers Series with number 1011.

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Length: 30 pages
Date of creation: 2010
Date of revision: Apr 2010
Handle: RePEc:eie:wpaper:1011

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  1. Bramoullé, Yann & Djebbari, Habiba & Fortin, Bernard, 2009. "Identification of peer effects through social networks," Journal of Econometrics, Elsevier, vol. 150(1), pages 41-55, May.
  2. Antoni Calv�-Armengol & Eleonora Patacchini & Yves Zenou, 2009. "Peer Effects and Social Networks in Education," Review of Economic Studies, Oxford University Press, vol. 76(4), pages 1239-1267.
  3. Cohen-Cole, Ethan, 2006. "Multiple groups identification in the linear-in-means model," Economics Letters, Elsevier, vol. 92(2), pages 157-162, August.
  4. de Paula, Áureo, 2009. "Inference in a synchronization game with social interactions," Journal of Econometrics, Elsevier, vol. 148(1), pages 56-71, January.
  5. Ethan Cohen-Cole & Giulio Zanella, 2007. "Unpacking social interactions," Risk and Policy Analysis Unit Working Paper QAU07-4, Federal Reserve Bank of Boston.
  6. Franklin Allen & Ana Babus & Elena Carletti, 2010. "Financial Connections and Systemic Risk," NBER Working Papers 16177, National Bureau of Economic Research, Inc.
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Cited by:
  1. Cohen-Cole, Ethan & Patacchini, Eleonora & Zenou, Yves, 2011. "Systemic Risk and Network Formation in the Interbank Market," CEPR Discussion Papers 8332, C.E.P.R. Discussion Papers.
  2. Silvia Gabrieli, 2011. "The microstructure of the money market before and after the financial crisis: a network perspective," CEIS Research Paper 181, Tor Vergata University, CEIS, revised 19 Jan 2011.

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