The Network of U.S. Mutual Fund Investments: Diversification, Similarity and Fragility throughout the Global Financial Crisis

by   Danilo Delpini, et al.

Network theory proved recently to be useful in the quantification of many properties of financial systems. The analysis of the structure of investment portfolios is a major application since their eventual correlation and overlap impact the actual risk diversification by individual investors. We investigate the bipartite network of US mutual fund portfolios and their assets. We follow its evolution during the Global Financial Crisis and analyse the interplay between diversification, as understood in classical portfolio theory, and similarity of the investments of different funds. We show that, on average, portfolios have become more diversified and less similar during the crisis. However, we also find that large overlap is far more likely than expected from models of random allocation of investments. This indicates the existence of strong correlations between fund portfolio strategies. We introduce a simplified model of propagation of financial shocks, that we exploit to show that a systemic risk component origins from the similarity of portfolios. The network is still vulnerable after crisis because of this effect, despite the increase in the diversification of portfolios. Our results indicate that diversification may even increase systemic risk when funds diversify in the same way. Diversification and similarity can play antagonistic roles and the trade-off between the two should be taken into account to properly assess systemic risk.


page 1

page 2

page 3

page 4


Measuring systemic risk and contagion in the European financial network

This paper introduces a novel framework to study default dependence and ...

A Comprehensive Survey on Enterprise Financial Risk Analysis: Problems, Methods, Spotlights and Applications

Enterprise financial risk analysis aims at predicting the enterprises' f...

Fund2Vec: Mutual Funds Similarity using Graph Learning

Identifying similar mutual funds with respect to the underlying portfoli...

Evolution of the Chinese Guarantee Network and Its Implication for Risk Management: Impacts from Financial Crisis and Stimulus Program

In this study, we provide a detailed global topological analysis on the ...

Evaluating structural edge importance in temporal networks

To monitor risk in temporal financial networks, we need to understand ho...

Optimal Clearing Payments in a Financial Contagion Model

Modern financial networks are characterized by complex structures of mut...

Top-Down Influence? Predicting CEO Personality and Risk Impact from Speech Transcripts

How much does a CEO's personality impact the performance of their compan...

Please sign up or login with your details

Forgot password? Click here to reset