Equilibrium Asset Pricing in Directed Networks

73 Pages Posted: 11 Nov 2014 Last revised: 29 Oct 2018

See all articles by Nicole Branger

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 16, 2018

Abstract

Directed links in cash flow networks affect the cross-section of price exposures and market prices of risk in equilibrium. In an asset pricing model featuring mutually exciting jumps, we measure directedness through an asset's shock propagation capacity (spc). In the model, we prove: (i) Cash flow shocks of high spc assets command high market prices of risk, (ii) the price reaction of an asset to its own cash flow shocks is less pronounced for high spc assets. Our results indicate it is necessary to decompose excess returns into their constituents to understand the implications of directed cash flow shock propagation.

Keywords: Directed cash flow networks, directed shocks, mutually exciting processes, recursive preferences

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 16, 2018). 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)

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