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Network Centrality and the Cross Section of Stock Returns

72 Pages Posted: 7 Jan 2013 Last revised: 17 Dec 2013

Kenneth R. Ahern

University of Southern California - Marshall School of Business; National Bureau of Economic Research (NBER)

Date Written: December 1, 2013

Abstract

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

Ahern, Kenneth R., Network Centrality and the Cross Section of Stock Returns (December 1, 2013). Available at SSRN: https://ssrn.com/abstract=2197370 or http://dx.doi.org/10.2139/ssrn.2197370

Kenneth Robinson Ahern (Contact Author)

University of Southern California - Marshall School of Business ( email )

701 Exposition Blvd
Los Angeles, CA 90089
United States

HOME PAGE: http://www-bcf.usc.edu/~kahern/

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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