A Network-Based Dynamic Analysis in an Equity Stock Market

Juan Eberhard,Alejandro Montecinos-Pearce,Jaime F Lavin

doi:10.1155/2017/3979836

Juan Eberhard, Alejandro Montecinos-Pearce + Show 1 more

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https://doi.org/10.1155/2017/3979836

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Journal: Complexity	Publication Date: Jan 1, 2017
Citations: 11	License type: CC BY 4.0

Affiliation: Adolfo Ibáñez University

Abstract

We study how changes in the structure of a brokers’ transaction network affect the probability with which the returns and volume of the traded financial assets change significantly. We analyze how the dynamics of the brokers’ transaction network are associated with the returns and volume observed in the Chilean stock market. To do this, we construct and validate an index that synthesizes the daily changes of the brokers’ transaction network structure of equity market transactions. We find that the changes of this structure are significantly correlated with variables that describe the local and international economic-financial environments. In addition, changes in the brokers’ transaction network structure are associated with a greater probability of positive shocks of more than two standard deviations in the stock exchange index return and total traded stock volume. These results suggest that the structure of the brokers’ trading relations plays a role in determining the returns and volume of transactions in the Chilean stock market.

Highlights

Bonds, or currencies create a transaction network among brokers which stems from the architecture of the financial market, which in turn affects the formation of capital asset prices and returns
We are interested in learning if the change in the transaction network may have significant effects on both returns and volume
In order to avoid the situation in which the threshold defining the network is relevant for our main results, the estimations are shown for different thresholds

Summary

Introduction

Bonds, or currencies create a transaction network among brokers which stems from the architecture of the financial market, which in turn affects the formation of capital asset prices and returns. Systems under certain conditions, such as loss of confidence in certain key nodes, would favor a rapid transmission of global financial shocks Another implication derived from this robust-yet-fragile characteristic of financial networks is related to how other network structure characteristics, such as their centrality measures, may affect the systemic risk. Aligned with Haldane’s proposal and considering the empirical evidence that indicates that transaction costs and frictions in financial markets affect asset’s values, returns, and volatility [21,22,23], our analysis takes the dynamic perspective to study how changes in the structure of a brokers’ transaction network in an equity market affect the probability of qualitatively significant changes in the stock returns and in their level of activity.

The Data

Econometric Analysis

Main Results

Additional Analysis