Firm Networks and Asset Returns
80 Pages Posted: 21 Feb 2017 Last revised: 24 Feb 2018
Date Written: 2017-01
This paper argues that changes in the propagation of idiosyncratic shocks along firm networks are important to understanding variations in asset returns. When calibrated to match key features of supplier-customer networks in the United States, an equilibrium model in which investors have recursive preferences and firms are interlinked via enduring relationships generates long-run consumption risks. Additionally, the model matches cross-sectional patterns of portfolio returns sorted by network centrality, a feature unaccounted for by standard asset pricing models.
Keywords: Asset returns, Firm networks, Shock propagation
JEL Classification: C02, C6, D53, E32, G12, L10
Suggested Citation: Suggested Citation