The network in Figure 1 displays the nodes (FTSE100 firms) and edges (the lines between the nodes). The edges show that Irithmics’ AI has identified a relationship between news about one firm and its impact on investors’ beliefs of another firm. From this network, we are able to visualise how news about any one FTSE100 firm was likely to “ripple” and affect investors’ beliefs of any other FTSE100 firm on Friday, February 7, 2020.
Looking towards the dense centre of the network, the firms most likely to have a ripple effect on the portfolios of investors in the event of news contagion were the financial services firms Standard Life Aberdeen, Barclays, Lloyds, Schroders, Aviva and RBS. News or a change in investors’ beliefs about these firms is likely to impact the exposures and risk taken by investors towards other firms.
The five firms most likely to have their exposure in portfolios adjusted (either increased or decreased) as a result of investors reacting to news about Standard Life Aberdeen would be Schroders (SDR), Barclays (BARC), Melrose (MRO), Royal Bank of Scotland (RBS) and Phoenix Group (PHNX). In contrast, the five firms least likely to have their exposures adjusted would be Informa (INF), Prudential (PRU), Barratt Developments (BDEV), GlaxoSmithKline (GSK) and Hargreaves Lansdown (HL).
This observation makes intuitive sense: news about SLA (a financial services firm) is likely to affect the views (and subsequently exposure and risk) towards other financial services firms. However, it’s curious that news contagion regarding SLA is unlikely to significantly affect investors’ views of HSBC or Legal & General (LGEN).
Whilst this is an illustrative example, understanding how news propagates through financial networks does have tangible benefits for corporates and fund managers. It provides insight into how news affects the views of investors and ultimately impacts the allocation of capital and risk in institutional portfolios.
Wang et al. also discuss another interesting idea, that of a “Control Mechanism”. Several academic, simulated models have shown different ways in which it might (theoretically) be possible to minimise or disrupt the spread of rumour and control the impact of news contagion. While research into control mechanisms have been largely motivated by the social, public health and political implications of rumour contagion (as we are seeing now with the Covid-19 coronavirus), they can be equally applied to understanding how news and views propagate and spread through company’s investor network and ripple through wider financial networks.
Over 16,000 listed corporates across North America, Europe and Australia are tracked and monitored daily by Irithmics’ AI which estimates how institutional investors are likely to adjust portfolio exposures and risks based on varying strategic, tactical and speculative views. While many views have similarities, the composition, ecosystem and evolution (or trajectory) of views is unique to each firm.
In the next few blog posts, we will take a more in-depth look into how deep learning is enhancing our understanding of how investors build and manage portfolios, and mitigate risks. We will use case studies to look at how insights from this technology benefit listed corporates, financial IR & PR advisors, asset managers and asset owners. On occasion we will also take a step back and review the current state-of-the-art in theories and models about how information spreads through human networks.
To learn about Irithmics Research or how our technology is helping corporates and asset managers understand the behaviour and dynamics of markets, just get in touch.