Understanding co-movements based on heterogeneous information associations

Both systematic and idiosyncratic information dissemination contribute to assets co-movement. To proxy for co-movement based on heterogeneous information diffusion, we construct two-layer network structures in terms of the correlations of systematic and idiosyncratic returns for Fama–French 49 industry portfolios. We further delve into the co-movement structures by studying their dynamics and interactions in terms of topological properties at both the system and individual levels. Our findings reveal the following: (1) Co-movement structures exhibit temporal changes and are closely associated with major risk events. (2) At the system level, there is time-varying mutual Granger causality between co-movement structures, particularly during or after recession periods. (3) At the individual level, we identify statistically significant but economically insignificant interplay between the two co-movement structures. Moreover, the co-movement structure based on systematic information diffusion is mainly influenced by industry-level characteristics, including idiosyncratic momentum, idiosyncratic volatility, and market beta. These results deepen our understanding of asset co-movement structures and bear significance for asset allocation and risk management practices.