A network analysis on fund portfolio mismatch and market volatility: evidence from China

ABSTRACT

A large number of studies suggest that network analysis can better explain the formation and contagion of financial risks. However, it’s controversial whether the financial network connection act as a booster or a stabilizer for market volatility. This paper proves that the degree of network connection is an essential factor in determining its impact on market volatility. It is found that actual industry-dimensional portfolios mismatch with the optimal portfolio constructed based on Markowitz portfolio theory, and the actual networks are over-connected by constructed the actual and optimal fund portfolio networks. Furthermore, it shows that the actual and optimal networks both act as stabilizer for market volatility, while the over-connection of networks exacerbates the market volatility and weaken the stability effect from the optimal network.

KEYWORDS:

• Markowitz portfolio theory
• fund portfolio mismatch
• Over-connected network
• market volatility

Disclosure statement

No potential conflict of interest was reported by the author(s).

Additional information

Funding

This work was supported by the Humanities and Social Science Research Program of Ministry of Education [21YJA790005].