Trade Fragmentation and Volatility-of-Volatility Dynamics : A Network Analysis

We assess the relationship between trade fragmentation in equity markets and the structure of volatility networks following the volatility-of-volatility (VoV) approach. Volatility networks offer an original method for measuring the common component of volatilities. We show that market fragmentation yields a reduction in VoV. This effect strengthens in the stabilizing fragmentation regime compared to the increased fragmentation regime. Since VoV has been shown to predict stock markets returns, this original finding on the relationship between trade fragmentation in equity markets and VoV is relevant not only to market operators, but also to regulators and public authorities