Broker Network Connectivity and the Cross-Section of Expected Returns

Abstract

This paper examines the relationship between broker network connectivity and stock returns in an order-driven market. Considering all stocks traded in Borsa Istanbul between January 2006 and November 2015, we estimate the monthly density, reciprocity and average weighted clustering coefficient as proxies for the broker network connectivity. Accordingly, firm-level cross-sectional regressions indicate a negative and significant predictive relationship between connectivity and one-month ahead stock returns. Specifically, 1% increase in network connectivity reduces the future returns by 2% even after controlling for other systematic factors. Our univariate and multivariate analyses show that stocks in the lowest connectivity quintile earn 1.0% - 1.6% monthly return premiums. We also document that the connectivity premium is stronger in terms of both economic and statistical significance for small size stocks.