Abstract

http://ssrn.com/abstract=2024483
 
 

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Dynamic Networks and Asset Pricing


Andrea Buraschi


The University of Chicago; Imperial College Business School; Centre for Economic Policy Research (CEPR)

Paolo Porchia


IE Business School

December 21, 2012

AFA 2013 San Diego Meetings Paper

Abstract:     
In the context of an equilibrium model with multiple risky assets, we map the characteristics of the network connecting firms' fundamentals to the cross-section of expected returns. We interpret network connectivity as the ability to transfer a distress state to other firms' fundamentals in a directed and timely manner. We show that 'central' firms, active at transferring but relative immune to distress, have lower P/D ratios and higher expected returns. We use corporate earnings to take the model to the data and estimate the network structure. In accordance with theoretical predictions, we find evidence of a positive centrality price of risk and a sizable centrality risk premium. Furthermore, network centrality helps to motivate the value premium as a distress causality risk premium: part of the expected return of value stocks in excess of growth stocks is a centrality premium in our results, and value stocks severely under-perform during economic downturns.

Number of Pages in PDF File: 33

Keywords: Dynamic Networks, Cross-Section of Expected Returns, Lucas Orchard

JEL Classification: G12, G14

working papers series


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Date posted: March 19, 2012 ; Last revised: December 23, 2012

Suggested Citation

Buraschi, Andrea and Porchia, Paolo, Dynamic Networks and Asset Pricing (December 21, 2012). AFA 2013 San Diego Meetings Paper. Available at SSRN: http://ssrn.com/abstract=2024483 or http://dx.doi.org/10.2139/ssrn.2024483

Contact Information

Andrea Buraschi
The University of Chicago ( email )
5807 S. Woodlawn Avenue
Chicago, IL 60637
United States
7738347123 (Phone)
HOME PAGE: http://www.andreaburaschi.com/

Chicago Booth School of Business Logo

Imperial College Business School ( email )
South Kensington Campus
Exhibition Road
London SW7 2AZ, SW7 2AZ
United Kingdom
HOME PAGE: http://www.andreaburaschi.com/
Centre for Economic Policy Research (CEPR)
77 Bastwick Street
London, EC1V 3PZ
United Kingdom
Paolo Porchia (Contact Author)
IE Business School ( email )
Serrano 99
Madrid, 28006
Spain
+34917821706 (Phone)
+34 91 745 47 62 (Fax)
HOME PAGE: http://paolo-porchia.profesores.ie.edu/
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