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Equilibrium asset pricing in directed networks

Nicole Branger, Patrick Konermann, Christoph Meinerding and Christian Schlag

No 37/2018, Discussion Papers from Deutsche Bundesbank

Abstract: Directed links in cash flow networks affect the cross-section of price exposures and market prices of risk in equilibrium. In an asset pricing model featuring mutually exciting jumps, we measure directedness through an asset's shock propagation capacity (spc). In the model, we prove: (i) Cash flow shocks of high spc assets command high market prices of risk, (ii) the price reaction of an asset to its own cash flow shocks is less pronounced for high spc assets. To illustrate our theoretical findings, we estimate an empirical network from industry cash flows and find support for these predictions.

Keywords: directed cash flow networks; directed shocks; mutually exciting processes; recursive preferences (search for similar items in EconPapers)
JEL-codes: G01 G12 D85 (search for similar items in EconPapers)
Date: 2018
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