The impact of network connectivity on factor exposures, asset pricing, and portfolio diversification

Monica Billio, Massimiliano Caporin, Roberto Panzica and Loriana Pelizzon

International Review of Economics & Finance, 2023, vol. 84, issue C, 196-223

Abstract: This paper extends the classic factor-based asset pricing model by including network linkages, leading to a network-augmented linear factor model. This extension of the model allows a better understanding of the determinants of systematic risk and shows that cross-sectional risk premia can be estimated more precisely. Moreover, we demonstrate that in the presence of network links a misspecified traditional linear factor model presents residuals that are correlated and heteroskedastic. We support our claims with an extensive simulation experiment and real data.

Keywords: CAPM; Volatility; Network; Interconnections; Systematic risk (search for similar items in EconPapers)
JEL-codes: C58 F35 G10 G12 (search for similar items in EconPapers)
Date: 2023
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Working Paper: The impact of network connectivity on factor exposures, asset pricing and portfolio diversification (2017)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:reveco:v:84:y:2023:i:c:p:196-223

DOI: 10.1016/j.iref.2022.11.002

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