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Equilibrium asset pricing in directed networks

Author

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  • Branger, Nicole
  • Konermann, Patrick
  • Meinerding, Christoph
  • Schlag, Christian

Abstract

Directed links in cash flow networks a↵ect the cross-section of risk premia through three channels. In a tractable consumption-based equilibrium asset pricing model, we obtain closed-form solutions that disentangle these channels for arbitrary directed networks. First, shocks that can propagate through the economy command a higher market price of risk. Second, shock-receiving assets earn an extra premium since their valuation ratios drop upon shocks in connected assets. Third, a hedge e↵ect pushes risk premia down: when a shock propagates through the economy, an asset that is unconnected becomes relatively more attractive and its valuation ratio increases.

Suggested Citation

  • Branger, Nicole & Konermann, Patrick & Meinerding, Christoph & Schlag, Christian, 2020. "Equilibrium asset pricing in directed networks," SAFE Working Paper Series 74, Leibniz Institute for Financial Research SAFE, revised 2020.
    • Handle: RePEc:zbw:safewp:74
    DOI: 10.2139/ssrn.2521434
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    Cited by:

    1. Baruník, Jozef & Ellington, Michael, 2024. "Persistence in financial connectedness and systemic risk," European Journal of Operational Research, Elsevier, vol. 314(1), pages 393-407.
    2. Billio, Monica & Caporin, Massimiliano & Panzica, Roberto & Pelizzon, Loriana, 2023. "The impact of network connectivity on factor exposures, asset pricing, and portfolio diversification," International Review of Economics & Finance, Elsevier, vol. 84(C), pages 196-223.
    3. Jozef Barunik & Michael Ellington, 2020. "Dynamic Network Risk," Papers 2006.04639, arXiv.org, revised Jul 2020.
    4. Shafiullah, Muhammad & Senthilkumar, Arunachalam & Lucey, Brian M. & Naeem, Muhammad Abubakr, 2024. "Deciphering asymmetric spillovers in US industries: Insights from higher-order moments," Research in International Business and Finance, Elsevier, vol. 70(PA).

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    More about this item

    Keywords

    Directed cash flow networks; directed shocks; mutually exciting processes; recursive preferences;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • D85 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Network Formation

    NEP fields

    This paper has been announced in the following NEP Reports:

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