We show that there exists an empirical linkage between nominal financial networks and the underlying economic fundamentals across countries. We construct the nominal return correlation networks from daily data to encapsulate sector-level dynamics and calculate the relative importance of the sectors in the nominal network through centrality measure and clustering algorithms. The centrality measure robustly identifies the backbone of the minimum spanning trees defined on the return networks. We show that the sectors that are relatively large constitute the core of the return networks, whereas the periphery is mostly populated by relatively smaller sectors. Therefore, sector-level nominal return dynamics is anchored to the real size effect, which ultimately shapes the optimal portfolios for risk management. The results are reasonably robust across 27 countries of varying degree of prosperity and across periods of market turbulence (2008-09), as well as relative calmness (2015-16).
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