72 Pages Posted: 7 Jan 2013 Last revised: 17 Dec 2013
Date Written: December 1, 2013
Industries that are more central in the network of intersectoral trade earn higher stock returns than industries that are less central. To explain this finding, I argue that stocks in more central industries have greater market risk because they have greater exposure to sectoral shocks that transmit from one industry to another through intersectoral trade. Consistent with this argument, stock returns of central industries covary more closely with market returns and future consumption growth. In addition, the empirical evidence suggests that sectoral shocks that contribute to aggregate risk are more likely to pass through central industries than peripheral industries.
Keywords: Systematic risk, intersectoral network, stock returns, diversification, input-output links
JEL Classification: G12, L14, E32
Suggested Citation: Suggested Citation
By Lu Zhang