Multilayer Aggregation with Statistical Validation: Application to Investor Networks

TL;DR

This paper introduces a statistical validation-based multilayer aggregation method for investor networks, enhancing analysis with transaction bootstrapping and investor categorization, applicable across various network types.

Contribution

It presents a novel, tractable multilayer aggregation procedure with improvements for investor network analysis, applicable beyond finance to other complex networks.

Findings

Capital households have high centrality, indicating they are well-informed investors.

Transaction bootstrapping improves statistical validation of investor relationships.

Window size significantly impacts the inferred network structure.

Abstract

Multilayer networks are attracting growing attention in many fields, including finance. In this paper, we develop a new tractable procedure for multilayer aggregation based on statistical validation, which we apply to investor networks. Moreover, we propose two other improvements to their analysis: transaction bootstrapping and investor categorization. The aggregation procedure can be used to integrate security-wise and time-wise information about investor trading networks, but it is not limited to finance. In fact, it can be used for different applications, such as gene, transportation, and social networks, were they inferred or observable. Additionally, in the investor network inference, we use transaction bootstrapping for better statistical validation. Investor categorization allows for constant size networks and having more observations for each node, which is important in the inference especially for less liquid securities. Furthermore, we observe that the window size used for averaging has a substantial effect on the number of inferred relationships. We apply this procedure by analyzing a unique data set of Finnish shareholders during the period 2004-2009. We find that households in the capital have high centrality in investor networks, which, under the theory of information channels in investor networks suggests that they are well-informed investors.