Equilibrium asset pricing in directed networks

Nicole Branger, Patrick Konermann, Christoph Meinerding and Christian Schlag

No 74, SAFE Working Paper Series from Leibniz Institute for Financial Research SAFE

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.

Keywords: Directed cash flow networks; directed shocks; mutually exciting processes; recursive preferences (search for similar items in EconPapers)
JEL-codes: D85 G12 (search for similar items in EconPapers)
Date: 2020, Revised 2020
New Economics Papers: this item is included in nep-net
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Citations: View citations in EconPapers (1)

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Related works:
Journal Article: Equilibrium Asset Pricing in Directed Networks* (2021)
Working Paper: Equilibrium asset pricing in directed networks (2018)
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:safewp:74

DOI: 10.2139/ssrn.2521434

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