Wisdom of the institutional crowd

The average portfolio structure of institutional investors is shown to have properties which account for transaction costs in an optimal way. This implies that financial institutions unknowingly display collective rationality, or Wisdom of the Crowd. Individual deviations from the rational benchmark are ample, which illustrates that system-wide rationality does not need nearly rational individuals. Finally we discuss the importance of accounting for constraints when assessing the presence of Wisdom of the Crowd.Comment: 11 pages, 12 figure

Statistically validated network of portfolio overlaps and systemic risk

Common asset holding by financial institutions, namely portfolio overlap, is nowadays regarded as an important channel for financial contagion with the potential to trigger fire sales and thus severe losses at the systemic level. In this paper we propose a method to assess the statistical significance of the overlap between pairs of heterogeneously diversified portfolios, which then allows us to build a validated network of financial institutions where links indicate potential contagion channels due to realized portfolio overlaps. The method is implemented on a historical database of institutional holdings ranging from 1999 to the end of 2013, but can be in general applied to any bipartite network where the presence of similar sets of neighbors is of interest. We find that the proportion of validated network links (i.e., of statistically significant overlaps) increased steadily before the 2007-2008 global financial crisis and reached a maximum when the crisis occurred. We argue that the nature of this measure implies that systemic risk from fire sales liquidation was maximal at that time. After a sharp drop in 2008, systemic risk resumed its growth in 2009, with a notable acceleration in 2013, reaching levels not seen since 2007. We finally show that market trends tend to be amplified in the portfolios identified by the algorithm, such that it is possible to have an informative signal about financial institutions that are about to suffer (enjoy) the most significant losses (gains)

Lightning network: a second path towards centralisation of the Bitcoin economy

The Bitcoin Lightning Network (BLN), a so-called "second layer" payment protocol, was launched in 2018 to scale up the number of transactions between Bitcoin owners. In this paper, we analyse the structure of the BLN over a period of 18 months, ranging from 12th January 2018 to 17th July 2019. Here, we consider three representations of the BLN: the daily snapshot one, the weekly snapshot one and the daily-block snapshot one. By studying the topological properties of the three representations above, we find that the total volume of transacted bitcoins approximately grows as the square of the network size; however, despite the huge activity characterising the BLN, the bitcoins distribution is very unequal: the average Gini coefficient of the node strengths (computed across the entire history of the Bitcoin Lightning Network) is, in fact, ~0.88 causing the 10% (50%) of the nodes to hold the 80% (99%) of the bitcoins at stake in the BLN (on average, across the entire period). This concentration brings up the question of which minimalist network model allows us to explain the network topological structure. Like for other economic systems, we hypothesise that local properties of nodes, like the degree, ultimately determine part of its characteristics. Therefore, we have tested the goodness of the Undirected Binary Configuration Model (UBCM) in reproducing the structural features of the BLN: the UBCM recovers the disassortative and the hierarchical character of the BLN but underestimates the centrality of nodes; this suggests that the BLN is becoming an increasingly centralised network, more and more compatible with a core-periphery structure. Further inspection of the resilience of the BLN shows that removing hubs leads to the collapse of the network into many components, an evidence suggesting that this network may be a target for the so-called split attacks.Comment: 11 pages, 7 figure

Comportement des traders institutionnels et microstructure des marchés : une approche big data

The thesis is divided into four parts.Part I introduces and provides a technical description of the FactSet Ownership dataset together with some preliminary statistics and a set of stylized facts emerging from the portfolio structure of large financial institutions, and from the capitalization of recorded securities.Part II proposes a method to assess the statistical significance of the overlap between pairs of heterogeneously diversified portfolios. This method is then applied to public assets ownership data reported by financial institutions in order to infer statistically robust links between the portfolios of financial institutions based on similar patterns of investment. From an economic point of view, it is suspected that the overlapping holding of financial institution is an important channel for financial contagion with the potential to trigger fire sales and thus severe losses at a systemic level.Part III investigates the collective behaviour of fund manager and, in particular, how the average portfolio structure of institutional investors optimally accounts for transactions costs when investment constraints are weak. The collective ability of a crowd to accurately estimate an unknown quantity is known as the Wisdom of the Crowd. In many situation, the median or average estimate of a group of unrelated individuals is surprisingly close to the true value.In Part IV, we use more than 6.7 billions of trades from the Thomson-Reuters Tick History database and the ownership data from FactSet. We show how the tick-by-tick dynamics of limit order book data depends on the aggregate actions of large funds acting on much larger time scale. In particular, we find that the well-established long memory of marker order signs is markedly weaker when large investment funds trade in a markedly directional way or when their aggregate participation ratio is large. Conversely, we investigate to what respect an asset with a weak memory experiences direction trading from large funds.Cette thèse est composée de quatre chapitres.Le premier chapitre est une description préliminaire de la base de données Factset Ownership. Nous en donnons une description statistique et exposons quelques faits stylisés caractérisant notamment la structure du portefeuille des institutions financières et fonds d'investissement, ainsi que la capitalisation boursière des entreprises y étant recensées.Le second chapitre propose une méthode d'évaluation statistique de la similarité entre des paires de portefeuilles d'institutions financières. Une paire statistiquement significative donnant lieu à la création d'un lien de similarité entre ces deux entités, nous sommes en mesure de projeter un réseau à l'origine bi-partite (entre institutions financières et entreprises) en un réseau mono-partite (entre institutions uniquement) afin d'en étudier l'évolution de sa structure au cours du temps. En effet, d'un point de vue économique, il est suspecté que les motifs d'investissements similaires constituent un facteur de risque important de contagion financière pouvant être à l'origine de banqueroutes aux conséquences systémiques significatives.Le troisième chapitre s'intéresse aux comportements collectifs des gestionnaires de fonds d'investissement et, en particulier, à la manière dont la structure du portefeuille de ces fonds prend en compte, en moyenne, de façon optimale les frais de transaction en présence de faibles contraintes d'investissements. Ce phénomène où, dans de nombreuses situations, la médiane ou la moyenne des estimations d'un groupe de personnes est étonnamment proche de la valeur réelle, est connu sous le nom de sagesse de la foule.Le quatrième chapitre est consacré à l'étude simultanée de données de marché. Nous utilisons plus de 6.7 milliards de trades de la base de données Thomson-Reuters Tick History, et de données de portefeuille de la base FactSet Ownership. Nous étudions la dynamique tick-à-tick du carnet d'ordres ainsi que l'action aggrégée, c'est-à-dire sur une échelle de temps bien plus grande, des fonds d'investissement. Nous montrons notamment que la mémoire longue du signe des ordres au marché est bien plus courte en présence de l'action, absolue ou directionnelle, des fonds d'investissement. Réciproquement nous expliquons dans quelle mesure une action caractérisée par une mémoire faible est sujette à du trading directionnel provenant de l'action des fonds d'investissement

Large-trader behaviour and market microstructure : a big data approach

Cette thèse est composée de quatre chapitres.Le premier chapitre est une description préliminaire de la base de données Factset Ownership. Nous en donnons une description statistique et exposons quelques faits stylisés caractérisant notamment la structure du portefeuille des institutions financières et fonds d'investissement, ainsi que la capitalisation boursière des entreprises y étant recensées.Le second chapitre propose une méthode d'évaluation statistique de la similarité entre des paires de portefeuilles d'institutions financières. Une paire statistiquement significative donnant lieu à la création d'un lien de similarité entre ces deux entités, nous sommes en mesure de projeter un réseau à l'origine bi-partite (entre institutions financières et entreprises) en un réseau mono-partite (entre institutions uniquement) afin d'en étudier l'évolution de sa structure au cours du temps. En effet, d'un point de vue économique, il est suspecté que les motifs d'investissements similaires constituent un facteur de risque important de contagion financière pouvant être à l'origine de banqueroutes aux conséquences systémiques significatives.Le troisième chapitre s'intéresse aux comportements collectifs des gestionnaires de fonds d'investissement et, en particulier, à la manière dont la structure du portefeuille de ces fonds prend en compte, en moyenne, de façon optimale les frais de transaction en présence de faibles contraintes d'investissements. Ce phénomène où, dans de nombreuses situations, la médiane ou la moyenne des estimations d'un groupe de personnes est étonnamment proche de la valeur réelle, est connu sous le nom de sagesse de la foule.Le quatrième chapitre est consacré à l'étude simultanée de données de marché. Nous utilisons plus de 6.7 milliards de trades de la base de données Thomson-Reuters Tick History, et de données de portefeuille de la base FactSet Ownership. Nous étudions la dynamique tick-à-tick du carnet d'ordres ainsi que l'action aggrégée, c'est-à-dire sur une échelle de temps bien plus grande, des fonds d'investissement. Nous montrons notamment que la mémoire longue du signe des ordres au marché est bien plus courte en présence de l'action, absolue ou directionnelle, des fonds d'investissement. Réciproquement nous expliquons dans quelle mesure une action caractérisée par une mémoire faible est sujette à du trading directionnel provenant de l'action des fonds d'investissement.The thesis is divided into four parts.Part I introduces and provides a technical description of the FactSet Ownership dataset together with some preliminary statistics and a set of stylized facts emerging from the portfolio structure of large financial institutions, and from the capitalization of recorded securities.Part II proposes a method to assess the statistical significance of the overlap between pairs of heterogeneously diversified portfolios. This method is then applied to public assets ownership data reported by financial institutions in order to infer statistically robust links between the portfolios of financial institutions based on similar patterns of investment. From an economic point of view, it is suspected that the overlapping holding of financial institution is an important channel for financial contagion with the potential to trigger fire sales and thus severe losses at a systemic level.Part III investigates the collective behaviour of fund manager and, in particular, how the average portfolio structure of institutional investors optimally accounts for transactions costs when investment constraints are weak. The collective ability of a crowd to accurately estimate an unknown quantity is known as the Wisdom of the Crowd. In many situation, the median or average estimate of a group of unrelated individuals is surprisingly close to the true value.In Part IV, we use more than 6.7 billions of trades from the Thomson-Reuters Tick History database and the ownership data from FactSet. We show how the tick-by-tick dynamics of limit order book data depends on the aggregate actions of large funds acting on much larger time scale. In particular, we find that the well-established long memory of marker order signs is markedly weaker when large investment funds trade in a markedly directional way or when their aggregate participation ratio is large. Conversely, we investigate to what respect an asset with a weak memory experiences direction trading from large funds

Large large-trader activity weakens the long memory of limit order markets

8 pages, 7 figuresUsing more than 6.7 billions of trades, we explore how the tick-by-tick dynamics of limit order books depends on the aggregate actions of large investment funds on a much larger (quarterly) timescale. In particular, we find that the well-established long memory of market order signs is markedly weaker when large investment funds trade either in a directional way and even weaker when their aggregate participation ratio is large. Conversely, we investigate to what respect a weaker memory of market order signs predicts that an asset is being actively traded by large funds. Theoretical arguments suggest two simple mechanisms that contribute to the observed effect: a larger number of active meta-orders and a modification of the distribution of size of meta-orders. Empirical evidence suggests that the number of active meta-orders is the most important contributor to the loss of market order sign memory

Collective rationality and functional wisdom of the crowd in far-from-rational institutional investors

The average portfolio structure of institutional investors is shown to have properties which account for transaction costs in an optimal way. This implies that financial institutions unknowingly display collective rationality, or Wisdom of the Crowd. Individual deviations from the rational benchmark are ample, which illustrates that system-wide rationality does not need nearly rational individuals. Finally we discuss the importance of accounting for constraints when assessing the presence of Wisdom of the Crowd