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Equilibrium Asset Pricing in Directed Networks

68 Pages Posted: 11 Nov 2014 Last revised: 30 Oct 2017

Nicole Branger

University of Muenster - Finance Center Muenster

Patrick Konermann

BI Norwegian Business School

Christoph Meinerding

Deutsche Bundesbank

Christian Schlag

Goethe University Frankfurt - Research Center SAFE

Date Written: October 14, 2017

Abstract

The direction of links in cash flow networks affects the cross-section of return volatilities, market prices of risk, and Sharpe ratios. We propose a flexible and tractable general equilibrium asset pricing model featuring a directed network. The model is based on mutually exciting jump processes in cash flows, and we suggest the shock propagation capacity (spc) of an asset implied by these dynamics as a measure for directedness. In our model, the higher spc, the lower the return volatility, and the higher the market price of jump risk. As an illustration we estimate an empirical network from industry cash flow data and find support for these predictions.

Keywords: General equilibrium asset pricing, recursive preferences, dynamic networks, mutually exciting processes, directed shocks

JEL Classification: G01, G12, D85

Suggested Citation

Branger, Nicole and Konermann, Patrick and Meinerding, Christoph and Schlag, Christian, Equilibrium Asset Pricing in Directed Networks (October 14, 2017). SAFE Working Paper No. 74; Finance Down Under 2016 Building on the Best from the Cellars of Finance. Available at SSRN: https://ssrn.com/abstract=2521434 or http://dx.doi.org/10.2139/ssrn.2521434

Nicole Branger

University of Muenster - Finance Center Muenster ( email )

Universitatsstr. 14-16
Muenster, 48143
Germany
+49 251 83 29779 (Phone)
+49 251 83 22867 (Fax)

HOME PAGE: http://www.wiwi.uni-muenster.de/fcm/fcm/das-finance-center/details.php?weobjectID=162

Patrick Konermann

BI Norwegian Business School ( email )

Nydalsveien 37
Oslo, 0442
Norway

Christoph Meinerding (Contact Author)

Deutsche Bundesbank ( email )

Wilhelm-Epstein-Str. 14
Frankfurt/Main, 60431
Germany

Christian Schlag

Goethe University Frankfurt - Research Center SAFE ( email )

(http://www.safe-frankfurt.de)
Theodor-W.-Adorno-Platz 3
Frankfurt am Main, 60323
Germany
+49 69 798 33699 (Phone)
+49 69 798 33901 (Fax)

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