International Asset Pricing with Strategic Business Groups
60 Pages Posted: 15 Jul 2021
Date Written: June 14, 2021
Firms in global markets often belong to business groups. We argue that this feature can have a profound influence on international asset pricing. In bad times, business groups may strategically reallocate risk across affiliated firms to protect core “central firms.” This strategic behavior induces co-movement among central firms, creating a new intertemporal risk factor. Based on a novel dataset of worldwide ownership for 2002-2012, we find that central firms are better protected in bad times and that they earn relatively lower expected returns. Moreover, a centrality factor augments traditional models in explaining the cross-section of international stock returns.
Keywords: International Asset Pricing, Business groups, Centrality, Co-movement.
JEL Classification: G20
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