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Developing a Composite Measure to Represent Information Flows in Networks: Evidence from a Stock Market

Wuyue (Phoebe) Shangguan1; Alvin Chung Man Leung2; Ashish Agarwal3; Prabhudev Konana4; XI CHEN5,6

1 Department of Management Science, School of Management, Xiamen University, Xiamen, Fujian 361005, China; · 2 Department of Information Systems, College of Business, City University of Hong Kong, Kowloon, Hong Kong · 3 Department of Information, Risk, and Operations Management, McCombs School of Business, The University of Texas at Austin, Austin, Texas 78712 · 4 Robert H. Smith School of Business, University of Maryland, University of Maryland, College Park, Maryland 20742-1815; · 5 Department of Data Science and Management Engineering, School of Management, Zhejiang University, Hangzhou 310058, China; · 6 Center for Research on Zhejiang Digital Development and Governance, Hangzhou 310058, China

Information Systems Research 2022

This paper employs a design science approach and proposes a new composite metric, eigen attention centrality (EAC), as a proxy for information flows associated with a node that considers both attention to a node and coattention with other nodes in a network. We apply the EAC metric in the context of a financial market where nodes are individual stocks and edges are based on coattention relationships among stocks. Composite information from different channels is used to measure attention and coattention. We evaluate the effectiveness of the EAC metric on predicting abnormal returns of stocks by (1) using multiple prediction methods and (2) comparing EAC with a set of alternative network metrics. Our analysis shows that EAC significantly outperforms alternative models in predicting the direction and magnitude of abnormal returns of stocks. Using the EAC metric, we derive a stock portfolio and develop a trading strategy that provides significant and positive excess returns. Lastly, we find that composite information has significantly better predictive performance than separate information sources, and such superior performance owes to information from social media instead of traditional media.

DOI
10.1287/isre.2021.1066
Volume
33 (2)
Pages
413-428
Language
en
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