Concentration of Ownership and Correlation Risk

Inside Science published an interesting article last week on recent research revealing shares around the world are owned by relatively few entities.

The article states "A recent analysis of the 2007 financial markets of 48 countries has revealed that the world's finances are in the hands of just a few mutual funds, banks, and corporations. This is the first clear picture of the global concentration of financial power. . ."

As the article mentions, there are fairly scary implications for correlation risk between different (anglo-saxon) exchanges, never mind asset classes. The results of the research also tie in nicely with Soros' theory of reflexivity. Because owners or owners' agents wield such concentration of power, when they act there is the clear potential for reflexivity to become super-charged into a geometrically progressive feedback loop, further perpetuating market disequilibrium which Soros is so fond of talking about. Perhaps this is one of the reasons why markets become so wildly inefficient for shorter periods when momentum gathers quickly in one direction or the other. The research conclusions also sit nicely with Mandelbrot's fractal view of the markets and the power law based self-similar processes that govern his theory.

The results also have implications for the 'wisdom of crowds' theory - when the 'crowd', at least on a ownership/ control basis, is anything but.

(HT GM)