Essays on Interlocking Directorates and Speculative Dynamics Inaugural-Dissertation zur Erlangung des akademischen Grades eines Doktors der Wirtschafts- und Sozialwissenschaften der Wirtschafts- und Sozialwissenschaftlichen Fakult¨at der Christian-Albrechts-Universit¨atzu Kiel vorgelegt von MSc Ricardo Giglio aus S~aoPaulo, Brasilien Kiel, September 2015 Gedruckt mit Genehmigung der Wirtschafts- und Sozialwissenschaftlichen Fakult¨at der Christian-Albrechts-Universit¨atzu Kiel Dekan: Professor Dr. Achim Walter Erstberichterstattender: Professor Dr. Thomas Lux Zweitberichterstattender: Professor Dr. Martin Quaas Drittberichterstattender: Professor Dr. Johannes Br¨ocker Tag der Abgabe der Arbeit: 18.03.2015 Tag der m¨undlichen Pr¨ufung:08.09.2015 \And the woman which thou sawest is that great city, which reigneth over the kings of the earth." Revelation 17:18 CHRISTIAN-ALBRECHTS-UNIVERSITAT¨ ZU KIEL Abstract Faculty of Business, Economics and Social Sciences Department of Economics Doctor of Philosophy Essays on Interlocking Directorates and Speculative Dynamics by Ricardo Giglio This thesis is composed by four chapters which can be classified in two broad topics. The first and second chapters deal with the properties of the networks created by interlock- ing directorates, while the third and fourth chapters with the so-called Efficient Market Hypothesis. Connecting these two topics is the notion of a stylized fact (also called a universal property) which is not accounted for by the currently stablished theory. The first chapter shows that the existence of a very well connected dominant community is not explained by the traditional preferential attachment models. In addition, it is also shown that the patterns of accumulation of board positions by single individuals observed in empirical data cannot be explained by a simple random binomial procedure. An in depth analysis of a time framed interlocking directorates dataset from Spain is presented in order to argue that board linkages might have generated some kind of special conditions for lending that would not exist if based on economic criteria only. In addition, the effects of a new gender equality regulation are investigate to conclude that women are still under represented in the boards of directors, although an increase in their absolute number could be observed. Finally, surrogate linearity tests and microscopic (agent based) models are applied in order to explain the stylized facts not account for by the Efficient Market Hypothe- sis. More specifically, with respect to the class of microscopic models called Structural Stochastic Volatility models, it is shown that the introduction of inactive traders in- creases the model ability to explain the stylized facts. Additionally, taking advantage of this model contest, it is argued that a simulation horizon one allows a model to run in order to estimate its parameters higher than what was previously assumed in not necessary in order to compare different models. Acknowledgements I wish to acknowledge the help provided by my supervisor, Dr. Thomas Lux, during the whole period of my research. His extremely qualified suggestions surely made the path for this research easier and much more interesting. I would also like to thank Dr. Simone Alfarano for the support and for the discussions during my stay in Spain. Special and kind thanks should be given to my wife Paula for the patience during these years of hard work, and to my family for their support and encouragement throughout my study, as it has always been in my life. Last but not least, thanks to Joseph for showing me that problems are always smaller than they look like. iii Contents Abstract ii Acknowledgements iii Contents iv List of Figures vii List of Tables xi 1 The Topology of the Global Interlocking Directorates4 1.1 Interlocking directorates............................5 1.2 Graph theory..................................7 1.3 Data description................................ 12 1.4 Random benchmark for the accumulation of board positions........ 14 1.5 Small worldness................................. 15 1.5.1 Communities.............................. 17 1.5.2 Random Graphs............................ 20 1.5.3 Ordered Graphs............................ 23 1.5.4 Country level interlocks........................ 23 1.5.5 Sector connectivity........................... 27 1.6 Kinds of small................................. 29 1.6.1 Watts/Strogatz small world graphs.................. 29 1.6.2 The distribution of connections.................... 31 1.6.3 Preferential attachment and growth................. 33 1.6.4 Power law fitting............................ 35 1.7 Network core.................................. 36 1.7.1 The most important nodes...................... 37 1.7.2 The rich club phenomena....................... 38 1.7.3 The rich club coefficient........................ 40 1.7.4 Coreness................................. 42 1.8 Conclusion................................... 44 Appendix A. The Topology of the Global Interlocking Directorates 46 2 Interlocking Directorates in Spain: Evidence from a Comprehensive Data Set 56 iv Contents v 2.1 Network stylized facts............................. 58 2.1.1 Data description............................ 58 2.1.2 Binomial benchmark for the accumulation of board positions... 59 2.1.3 Existence of a Large Connected Component............. 60 2.1.4 Persistence of the Large Connected Component........... 60 2.1.5 Small world............................... 62 2.1.6 Heavy-tailedness of the Degree Distribution............. 65 2.1.7 Network core.............................. 66 2.1.8 Rich Club Phenomenon........................ 68 2.2 Most Important Players............................ 70 2.2.1 Most Important Directors....................... 70 2.2.2 Most Important Companies...................... 70 2.2.3 Network of Sectors........................... 70 2.2.4 The Banking System.......................... 71 2.3 Network position impact on firm level data................. 73 2.3.1 Relationship between centrality and performance.......... 76 2.3.2 Investigation on the value of busy directors............. 77 2.4 Ibex, gender differences, and politicians................... 78 2.4.1 Ibex boards............................... 79 2.4.2 Gender Differences........................... 80 2.4.3 Political affiliation........................... 84 Appendix B. Interlocking Directorates in Spain: Evidence from a Com- prehensive Data Set 87 3 Investigation on the Simulation Horizon Requirement for Estimation of Agent Based Models 106 3.1 Stylized Facts.................................. 109 3.2 Taxonomy.................................... 110 3.3 Agent Based Model Implementation..................... 113 3.3.1 Trading Inactivity Model....................... 113 3.3.2 Structural Stochastic Volatility Model................ 115 3.3.3 Introducing Inactivity to SSV Models................ 117 3.4 Estimation................................... 118 3.5 Experiment on Simulation Horizon Requirements.............. 120 3.5.1 Definition of a model specific p-value................. 120 3.5.2 Model fit for different simulation horizons.............. 121 3.5.3 Assessing the incorporation of inactive traders........... 123 4 Testing for non-linear structures in artificial financial data: A Recur- rence Quantification Approach 127 4.1 Recurrence Quantification Analysis...................... 129 4.1.1 Recurrence Plots............................ 129 4.1.2 Lorenz System Example........................ 130 4.2 Complexity Measures Based on the Recurrence Plot............ 132 4.2.1 Logistic Map Example......................... 136 4.3 Surrogate Linearity Test Based on Recurrence Quantification....... 138 Contents vi Appendix D. Testing for non-linear structures in artificial financial data: A Recurrence Quantification Approach 145 Bibliography 153 Affirmation 160 List of Figures 1.1 Example graph S, consisting of a set of 7 nodes N(S) = [0; 1; 2; 3; 4; 5; 6] and a set of 6 edges M(S) = [f0; 1g; f0; 2g; f1; 2g; f0; 3g; f3; 4g; f5; 6g]...8 1.2 Relative frequency of empirical multiple board membership (red circles) and the random binomial benchmark (blue x's) for four selected developed countries..................................... 16 1.3 Relative frequency of empirical multiple board membership (red circles) and the random binomial benchmark (blue x's) for four selected develop- ing countries................................... 17 1.4 Binomial benchmark and empirical frequencies of multiple board posi- tions. (A) all directors, (B) directors with at least one connection, (C) directors holding at least two board positions, and (D) only the LCC is considered.................................... 18 1.5 Illustrational simulation results for the behavior of the number of compo- nents and the size of the largest component in an ER random graph. The N 1 solid vertical line indicates the threshold c = n ∼ 2 . For instance, with 1 respect to the number of components, if c < 2 the number of components 1 reduces linearly with the increase in N, while for c > 2 this is no longer the case...................................... 21 1.6 An example of ordered graph which exhibits large clustering coefficients and communities, but it is not small world.................. 24 1.7 Country level aggregation of international interlocks. The weighted con- nection between two countries is defined by the number of directors hold- ing simultaneous positions in companies from both countries. Directors whose all positions are in companies of the same