Dynamic Network Risk

62 Pages Posted: 7 Jul 2020

See all articles by Michael Ellington

Michael Ellington

University of Liverpool

Jozef Baruník

Charles University in Prague - Department of Economics; Institute of Information Theory and Automation, Prague

Date Written: June 8, 2020

Abstract

This paper examines the pricing of short-term and long-term dynamic network risk in the cross-section of stock returns. Stocks with high sensitivities to dynamic network risk earn lower returns. We rationalize our finding with economic theory that allows the stochastic discount factor to load on network risk through the precautionary savings channel. A one-standard deviation increase in long-term (short-term) network risk loadings associate with a 7.66% (6.71%) drop in annualized expected
returns.

Keywords: Network Risk, Firm Volatility, Cross Section Of Stock Returns

JEL Classification: G10, G12, C58

Suggested Citation

Ellington, Michael and Barunik, Jozef, Dynamic Network Risk (June 8, 2020). Available at SSRN: https://ssrn.com/abstract=3622200 or http://dx.doi.org/10.2139/ssrn.3622200

Michael Ellington (Contact Author)

University of Liverpool ( email )

Chatham Street
Liverpool, L69 7ZA
United Kingdom

Jozef Barunik

Charles University in Prague - Department of Economics ( email )

Opletalova 26
Prague 1, 110 00
Czech Republic

HOME PAGE: http://ies.fsv.cuni.cz/en/staff/barunik

Institute of Information Theory and Automation, Prague ( email )

Pod vodarenskou vezi 4
CZ-18208 Praha 8
Czech Republic

HOME PAGE: http://staff.utia.cas.cz/barunik/home.htm

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