Equilibrium Asset Pricing in Directed Networks
73 Pages Posted: 11 Nov 2014 Last revised: 29 Oct 2018
Date Written: October 16, 2018
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
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