Dynamics of Investor Spanning Trees Around Dot-Com Bubble

TL;DR

This paper investigates how investor networks, especially households, change during the dot-com bubble using correlation-based spanning trees, revealing that household investor networks pre-reacted to the bubble burst.

Contribution

It introduces a method to analyze temporal investor networks using spanning trees and compares behaviors across different investor types during a financial bubble.

Findings

Household investor networks reflected bubble buildup and burst in spanning tree measures.

Minimal and maximal spanning trees of households pre-reacted to the bubble burst.

Non-financial and financial institutions showed less clear network reactions.

Abstract

We identify temporal investor networks for Nokia stock by constructing networks from correlations between investor-specific net-volumes and analyze changes in the networks around dot-com bubble. We conduct the analysis separately for households, non-financial institutions, and financial institutions. Our results indicate that spanning tree measures for households reflected the boom and crisis: the maximum spanning tree measures had clear upward tendency in the bull markets when the bubble was building up, and, even more importantly, the minimum spanning tree measures pre-reacted the burst of bubble. At the same time, we find less clear reactions in minimal and maximal spanning trees of non-financial and financial institutions around the bubble, which suggest that household investors can have a greater herding tendency around bubbles.