Equilibrium Asset Pricing in Directed Networks*
Risk premia and term premia in general equilibrium
Nicole Branger,
Patrick Konermann,
Christoph Meinerding and
Christian Schlag
Review of Finance, 2021, vol. 25, issue 3, 777-818
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.
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: 2021
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Citations: View citations in EconPapers (2)
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