Resilience to the financial crisis in customer-supplier networks

Xiao Yu, Ramazan Gencay and Keyi Zhang

Quantitative Finance, 2019, vol. 19, issue 8, 1409-1423

Abstract: Inspired by the Capital Asset Pricing Model (CAPM) beta, we construct customer and supplier betas to separately investigate potentially different properties of downstream and upstream linkages. With the adjacency matrix acting as a ‘filter’ to extract each company's return covariances with its trading partners, the cross-sectional dependence contained in the customer-supplier network is summarized by our betas. We explore how these two betas are related to a company's resilience to the financial crisis of 2008–2009. We observe that a higher customer beta is generally associated with more resilience during the crisis. Therefore, investors could construct the customer beta to gain insights into the relative negative impact of a potential crisis on a stock's performance.

Date: 2019
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DOI: 10.1080/14697688.2019.1576918

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