Equilibrium Asset Pricing in Directed Networks

48 Pages Posted: 11 Nov 2014 Last revised: 22 Oct 2019

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

Leibniz Institute for Financial Research SAFE

Date Written: October 16, 2019

Abstract

Directed links in cash flow networks affect the cross-section of risk premia through three channels. In a tractable consumption-based equilibrium asset pricing model, we obtain closed-form solutions that disentangle these channels for arbitrary directed networks. First, shocks that can propagate through the economy command a higher market price of risk. Second, shock-receiving assets earn an extra premium since their valuation ratios drop upon shocks in connected assets. Third, a hedge effect pushes risk premia down: when a shock propagates through the economy, an asset that is unconnected becomes relatively more attractive and its valuation ratio increases.

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

JEL Classification: G12, D85

Suggested Citation

Branger, Nicole and Konermann, Patrick and Meinerding, Christoph and Schlag, Christian, Equilibrium Asset Pricing in Directed Networks (October 16, 2019). 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

Leibniz Institute for Financial Research 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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