Article2018

Networks in Production: Asset Pricing Implications

166 citations0/0 files storedThe Journal of Finance

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Financial Markets and Investment Strategies Financial Risk and Volatility Modeling Economic theories and models

Abstract

ABSTRACT In this paper, I examine asset pricing in a multisector model with sectors connected through an input‐output network. Changes in the network are sources of systematic risk reflected in equilibrium asset prices. Two characteristics of the network matter for asset prices: network concentration and network sparsity. These two production‐based asset pricing factors are determined by the structure of the network and are computed from input‐output data. Consistent with the model predictions, I find return spreads of 4.6% and −3.2% per year on sparsity and concentration beta‐sorted portfolios, respectively.

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References

1993Common risk factors in the returns on stocks and bonds 1973Risk, Return, and Equilibrium: Empirical Tests 2006The Cross‐Section of Volatility and Expected Returns 2000Risks for the Long Run: A Potential Resolution of Asset Pricing Puzzles 1953A New Status Index Derived from Sociometric Analysis 2012The Network Origins of Aggregate Fluctuations 1983Real Business Cycles 2015Systemic Risk and Stability in Financial Networks

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