Equilibrium Asset Pricing in Directed Networks

60 Pages Posted: 11 Nov 2014 Last revised: 6 Oct 2020

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; Leibniz Institute for Financial Research SAFE

Date Written: July 30, 2020

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 (July 30, 2020). Review of Finance, Forthcoming, Finance Down Under 2016 Building on the Best from the Cellars of Finance, SAFE Working Paper No. 74, 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 ( email )

Faculty of Economics and Business
Theodor-W.-Adorno-Platz 3
Frankfurt am Main, Hessen 60323
Germany

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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