Alladi Ramakrishnan Hall

Correlations and co-movements in financial networks: A mesoscopic analysis

Anirban Chakraborti

JNU, New Delhi

The structure of a complex network comprised of dissimilar units of a system interacting with each
other, affects the dynamics of the system and provides deeper insight about the functionality of the
system, its evolution, and the role of individual or modular units. Thus, network analysis has become a primary tool in the fields as diverse as biology, ecology, sociology, economics, finance, etc. We construct the nominal return correlation networks from daily data to encapsulate sector-level dynamics and calculate the relative importance of the sectors in the nominal network through centrality measures and clustering algorithms (minimum spanning trees and multidimensional scaling). We show that the sectors that are relatively large constitute the core of the return networks, whereas the periphery is mostly populated by relatively smaller sectors. Further, sector-level nominal return dynamics is anchored to the real size effect, which ultimately shapes the optimal portfolios for risk management.