Do interfund network centralities affect fund systematic risk? Evidence from China open-ended funds

Abstract

ABSTRACT Open-ended funds have been widely favoured by investors in China due to their high liquidity and the sufficiency of their information disclosure. We construct an interfund network to investigate the relationship between fund centralities and fund systematic risk. The results confirm the existence of a linkage effect in the fund network during the stock market crisis of 2015 while the fund network returned to a looser state after the crisis. In addition, the degree centrality and closeness centrality of funds in the network have significant positive effects on systematic risk, with a fund either playing a relatively crucial role in the network or maintaining sufficient proximity to other funds, both of which amplify the level of systematic risk. In addition, the fund shareholding ratio has a positive moderating effect on the relationship between fund centrality and systematic risk. We speculate that systematic risk can be diffused across funds through the stock market, which directly relates to fund network characteristics. Fund interconnectedness plays a more pronounced role than fund size in systematic risk, thus supporting the ‘too connected to fail’ perspective. Regulators are recommended to focus on ‘social star’ funds with high degrees or proximity centralities.