Faculty of Economics and Business Administration Publications Database

Equilibrium Asset Pricing in Directed Networks

Selected SAFE
Authors:
Branger, Nicole
Konermann, Patrick
Source:
Volume: 25
Number: 3
Pages: 777 - 818
Month: 05
ISSN-Print: 1572-3097
Link External Source: Online Version
Year: 2021
Keywords: Directed cash flow networks; directed shocks; mutually exciting processes; recursive preferences
Abstract:

Directed links in cash flow networks affect 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 effect 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.

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