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Equilibrium Asset Pricing in Directed Networks

forthcoming in Review of Finance

Authors:
Nicole Branger,
Patrick Konermann,
Christoph Meinerding,
Christian Schlag
Research Area:
Financial Markets, Systemic Risk Lab
Date:
Oct 2020
Keywords:
Dynamic Networks, Mutually Exciting Processes, Asset Pricing, General Equilibrium, Recursive Preferences
Abstract:

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.

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