Paper: arXiv 2603.20271

Authors: Sungwoo Kang

Abstract

Whether heterogeneous investor flows transmit private information across stocks or merely reflect coordinated responses to public signals remains an open question in market microstructure. We construct Transfer Entropy (TE) networks from investor-type flows – foreign, institutional, and individual – for \numNStocks{} Korean equities over \numNDates{} trading days (January 2020 to February 2025), and evaluate their economic content through interaction information (II), conditional TE, mutual information (MI), Kelly criterion bounds, and Fama-MacBeth regressions. Three findings emerge. First, TE networks are sparse and structurally heterogeneous: foreign investors maintain few but strong links (\numEdgesFor{} edges, mean TE = \numMeanTEFor{}), while individual investors form many but weak links (\numEdgesInd{} edges, mean TE = \numMeanTEInd{}). Second, cross-investor information is redundant rather than synergistic, no investor type directionally dominates another, and MI between signals and returns is zero at the daily horizon. Third, network centrality adds negligible alpha in cross-sectional regressions, with only one of six signal-centrality interactions reaching marginal significance. These results indicate that the observed propagation structure captures shared information processing rather than private signal cascades, consistent with daily-frequency market efficiency.

Complexity vs Empirical Score

  • Math Complexity: 6.5/10
  • Empirical Rigor: 8.0/10
  • Quadrant: Holy Grail — high math complexity, high empirical rigor

Why this score: The paper uses sophisticated information-theoretic metrics like Transfer Entropy, Interaction Information, and Kelly bounds to analyze market microstructure dynamics across investor types. It features strong empirical rigor using comprehensive Korean equity market flow data over a five-year period with robust statistical testing like Fama-MacBeth regressions.

Research Flowchart

  flowchart TD
    A[Research Goal: Do investor order flows transmit private signals or reflect public responses?] --> B[Data Inputs: Daily flows for Foreign, Institutional, & Individual investors on Korean equities]
    B --> C[Network Construction: Estimate Transfer Entropy networks between investor-type flows]
    C --> D[Economic Evaluation: Compute Interaction Info, Mutual Info, Kelly Bounds & Fama-MacBeth Regressions]
    D --> E1[Outcome 1: Foreign networks are sparse/strong; Individual networks are dense/weak]
    D --> E2[Outcome 2: Flow information is redundant & MI with daily returns is zero]
    D --> E3[Outcome 3: Network centrality adds no alpha, confirming market efficiency]