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Network connectedness and the contagion structure of informed trading: Evidence from the time and frequency domains

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  • Zhao, Wandi
  • Gao, Yang

Abstract

In this paper, the network connectedness of informed trading between industries and its contagion structure are studied in the time and frequency domains based on Chinese stock markets. Using the spillover index method, we find significant interindustry spillover effects of informed trading. Specifically, Industrials, Consumer Discretionary, and Materials are the primary spillover sources that have strong outward spillover effects on all other industries, while Communication Services and Financial represent the top recipients in the market. In addition, using the network community detection algorithm, a 2-community structure of contagion is further revealed. The two communities are driven by Industrials and Consumer Discretionary, respectively. More important, the strong outward effects of Industrials, Consumer Discretionary, and Materials and their interlinkages would cause both intracommunity and intercommunity spillovers and result in market-wide informed trading contagion. Furthermore, the frequency decomposition analysis illustrates that interindustry spillovers of informed trading are usually dominated by low-frequency (6–200 days) connectedness. Finally, the contributing factor analysis demonstrates that macroeconomic changes are the main determinants of informed trading spillovers.

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  • Zhao, Wandi & Gao, Yang, 2023. "Network connectedness and the contagion structure of informed trading: Evidence from the time and frequency domains," International Review of Financial Analysis, Elsevier, vol. 90(C).
    • Handle: RePEc:eee:finana:v:90:y:2023:i:c:s1057521923004234
    DOI: 10.1016/j.irfa.2023.102907
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    More about this item

    Keywords

    Informed trading; Industry board; Spillover effect; Network community detection;
    All these keywords.

    JEL classification:

    • C38 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Classification Methdos; Cluster Analysis; Principal Components; Factor Analysis
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation

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