Equilibrium Asset Pricing in Directed Networks
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.
Cite as
Branger, N., Konermann, P., Meinerding, C., & Schlag, C. (2021). Equilibrium Asset Pricing in Directed Networks. Review of Finance, 2021, 777–818.Details
Publication type
Research article (journal)
Peer reviewed
Yes
Publication status
Published
Year
2021
Journal
Review of Finance
Volume
2021
Start page
777
End page
818
Language
English
ISSN
1572-3097
DOI