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Trade fragmentation and volatility-of-volatility networks

Author

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  • Cécile Bastidon

    (IXXI - Institut Rhône-Alpin des systèmes complexes - ENS de Lyon - École normale supérieure de Lyon - UL2 - Université Lumière - Lyon 2 - UJML - Université Jean Moulin - Lyon 3 - Université de Lyon - UCBL - Université Claude Bernard Lyon 1 - Université de Lyon - INSA Lyon - Institut National des Sciences Appliquées de Lyon - Université de Lyon - INSA - Institut National des Sciences Appliquées - Inria - Institut National de Recherche en Informatique et en Automatique - CNRS - Centre National de la Recherche Scientifique - UGA - Université Grenoble Alpes, LEAD - Laboratoire d'Économie Appliquée au Développement - UTLN - Université de Toulon)

  • Fredj Jawadi

    (LUMEN - Lille University Management Lab - ULR 4999 - Université de Lille)

Abstract

We assess the impact of trade fragmentation in equity markets using volatility networks following the volatility-of-volatility (VoV) approach. VoV networks offer an original method for measuring and visualizing the common component of volatilities. We use topological distance and connectivity indicators describing their structure as alternative proxies of VoV. Further, we use panel tests to apply threshold effects regression models on French equity market data after the introduction of MiFID, both at portfolio level and asset level. We show that market fragmentation yields a reduction in VoV, corresponding to both a contraction of volatility networks and a change in their structure. This effect strengthens in the stabilizing fragmentation regime compared to the increased fragmentation regime. Since VoV has been shown to predict stock markets returns, this original finding is widely relevant to market operators, regulators and public authorities.
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Suggested Citation

  • Cécile Bastidon & Fredj Jawadi, 2024. "Trade fragmentation and volatility-of-volatility networks," Post-Print hal-04478721, HAL.
    • Handle: RePEc:hal:journl:hal-04478721
    DOI: 10.1016/j.intfin.2023.101908
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    • C65 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Miscellaneous Mathematical Tools
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • 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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